Liquidation is the process of liquidating an asset or a group of assets. In finance, liquidation typically refers to selling off all assets in order to pay off debt obligations. Liquidation can also be used for tax purposes, where a company may sell its assets in order to reduce its taxable income and profits.
In cryptocurrency markets, liquidations are often triggered when a trader’s position reaches certain predetermined price levels set by their margin provider (usually an exchange). When this happens, the margin provider will close out the position and take possession of any collateral held by the trader. This process is known as “margin call” or “forced liquidation”. The proceeds from forced liquidations are used to cover any losses incurred on the position and can be distributed among other traders who have positions open against that same trading pair at that point in time.
Traders should always ensure they keep adequate margins within their account so as not to risk getting into a situation where a forced liquidation may occur due to insufficient funds available for covering potential losses resulting from market movements. By doing so, traders will protect themselves from being exposed unnecessarily which would lead them having positions forcefully closed with very unfavorable outcomes such as incurring heavy losses on those positions or even worse losing all money invested through them