Liquidation
When a leveraged trading position or undercollateralized loan is forcibly closed by a protocol to prevent losses exceeding the deposited collateral. Liquidation typically happens automatically when the collateral value falls below a set threshold.
Why It Matters
Liquidation refers to the process of selling off assets to cover losses, especially when using borrowed funds. This concept is crucial for understanding risk management in crypto trading, especially in volatile markets.
Example
If you have borrowed funds to trade on margin and the value of your assets drops below a set level, the platform may automatically sell your assets to recover the loan. This can happen without any warning if the prices fall quickly.
Beginner Context
For beginners, knowing about liquidation highlights the risks of trading on margin. It’s an important lesson in financial safety and the importance of monitoring investments closely in volatile markets.
Mike Starr
Founder, CryptoWizardTools · M.S. Organizational Management
Last reviewed: August 2026
Related Terms
Fiat Currency
Money issued by a government that is not backed by a physical commodity like gold. Examples include the US Dollar, Euro, and British Pound. In crypto, fiat is often used as the starting point to buy digital assets.
Hard Cap
The maximum amount of money a token sale or fundraising round intends to raise. Once the hard cap is reached, the sale closes. It is distinct from a token's max supply, which refers to the total number of tokens that will ever exist.
Initial DEX Offering
A token launch that takes place on a decentralized exchange rather than a centralized platform. IDOs give the public earlier access to new projects and allow for immediate open-market trading once launched.
Hash Function
A mathematical algorithm that converts any input data into a fixed-length output string called a hash. Hash functions are one-way — you can't reverse-engineer the input from the output. They are fundamental to blockchain security and data integrity.
Flippening
A hypothetical event in which Ethereum's market capitalization surpasses Bitcoin's, making Ethereum the largest cryptocurrency by market cap. The term is used by Ethereum supporters to describe this potential milestone.