Historic liquidation of over $ 1.5 billion in 48 hours
Unfortunately, the start of 2022 is marked with an unprecedented liquidation of more than $ 1.5 billion in 48 hours. In mid-January 6, the Coinglass site reported an $ 889.46 million liquidation in 24 hours, resulting in a loss for 224,892 investors. Leveraged cryptocurrency traders lost about USD 600 million in the first 12 hours of January, 6. Furthermore, losses of $ 536.48 million were reported on January 7, which is an unusually high amount for the market, although it was still lower than the previous day’s first 12 hours. This article explains what is historic liquidation on the cryptocurrency market and what factors started this.
What is liquidation?
Traditionally, liquidation involves the conversion of assets into cash. When an exchange forcefully terminates a leveraged trader’s position owing to a partial or complete loss of the trader’s initial margin, this means the liquidation in the cryptocurrency market. Let us emphasize that the initial margin relates to the money you deposited to begin a trading position. It is a type of security that functions as an insurance fund for the exchange if the transaction goes against the borrower. In other words, if a trader does not have enough funds to keep an open deal active, the exchange immediately terminates it.
We can calculate the liquidation percentage by dividing 100 by the amount of leverage. As an example, if you use 4x leverage, the liquidation percentage would be 25, because 100/4 is 25. Knowing the percentage of liquidation is important because it demonstrates the relationship between the movement of the asset’s price and the time of liquidation. In our case, if the asset’s price changes by 25%, the position will be liquidated. Given the extraordinary volatility of the cryptocurrency market, it is evident that the larger the leverage, the riskier the deal.
How to avoid liquidation?
Some cryptocurrency exchanges that provide derivatives trading generate enormous profits by liquidating positions. Besides, traders may avoid this by following a few easy rules. Most traders are unaware of how derivatives exchanges mitigate the risks associated with supplying margin money. Even in the market situation, the common belief is that “winners get the losers’ money”. However, this is not as straightforward as it seems.
It is important to note that leveraged trading is so risky that some countries prohibit it on crypto exchanges to protect novice traders from liquidation and losses. Many experts highly advise using a stop loss. In this case, your assets will be automatically sold if the price increases or falls below a certain level. According to experts, it is best to establish a stop loss of 2–5 % of the deal amount. The next point concerns the margin ratios. It is essential to keep in mind that if the margin ratio approaches 100%, the exchange liquidates the position. To prevent this, increase the margin or reduce the position by lowering your leverage. Also, keep the margin ratios below 80%.
Bitcoin had the largest sell-offs in those two days with $ 511.2 million in losses, followed by Ethereum with $ 394.97 million. This accounts for more than half of all losses created. Their enormous trading volume and market capitalization are more significant in comparison to other cryptocurrencies. On the other hand, the derivatives market provides much bigger returns than the spot market. Producing a temporary commitment on the asset via bilateral contracts can diminish potential losses.
According to reports of large-scale Bitcoin falls in 2021, the government’s policy, famous individuals, and whales have a huge impact on the cryptocurrency rates. They easily can both support and decrease the crypto economy. So, it is critical to stay current on developments in the crypto sector. In addition, be informed of what is going on in the rest of the world. In conclusion, do not overlook the market mood and whale behavior. During times of market vibrancy, crypto whales can aggressively dump huge volumes of BTC, causing significant price drops.
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Valentyna Bereza, Team bit4you.