Glossary

Liquidation is the selling of cryptocurrencies for cash, usually involuntarily, as a result of the investor’s inability to meet the minimum margin for their leveraged position.

Introduction to Liquidation in Cryptocurrency

In the dynamic world of cryptocurrency, liquidation plays a pivotal role, particularly in leveraged trading. 

 occurs when a trader's position is closed forcibly by the exchange because the trader's margin balance falls below the required maintenance margin level. This can be a common occurrence in volatile markets.

Leverage amplifies both potential gains and losses. While it can increase a trader’s buying power, it also increases the risk of liquidation. Understanding the 

 is crucial for any investor looking to venture into these waters.

 is essential to avoid unwanted liquidations. Using stop-loss orders and constantly monitoring your positions are key steps in this direction.

The Impact of Liquidation on the Crypto Market

Liquidation can significantly impact the crypto market. Large-scale liquidations can lead to rapid price declines, creating what is known as a 'cascade effect'.

In May 2021, a mass liquidation event occurred, where approximately $8 billion worth of Bitcoin positions were liquidated, leading to a rapid decline in Bitcoin's price.

 can help in managing trades and reducing the risk of liquidation.

In the DeFi sector, liquidation works differently. Loans on DeFi platforms like 

 often require collateral. If the value of the collateral drops below a certain threshold, it can trigger liquidation.

It's essential to understand the terms of your loan and the volatility of your collateral. Using stablecoins as collateral can be a safer choice.

Liquidation, while a significant risk in cryptocurrency trading, can be managed effectively through proper understanding and risk management. Whether trading on 

 or participating in the DeFi ecosystem, an informed approach is crucial.

To stay ahead in the fast-paced world of cryptocurrency, continual learning is key. Explore comprehensive guides and articles on Bybit Learn, such as understanding the basics of 

Liquidation

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