If you use leverage trading it’s important to understand that you use borrowed funds when trading with leverage. It’s essential to be able to give back those borrowed funds to maintain trust in the crypto leverage space, otherwise, there will be no lenders and no leverage trading.

Liquidation often refers to the process of forced selling to save the borrowed funds to be able to handle them back to the borrower.

A trader can lose part or the total amount of the initial margin. This happens when they cannot meet the margin requirements for their leveraged position.

Margin requirements will often be underfunded when there’s a sharp and sudden drop in the underlying asset’s price. These types of events often lead to a cascade of liquidation and sell pressure in the market since exchanges will automatically close out the positions, resulting in a loss of funds for the investor.

The severity of this loss will depend on the initial margin in place and how much the price drops. In some cases, it can lead to a total investment loss.

Liquidations can be categorized into partial and total liquidation. For example:

Partial liquidation: Liquidation that closes a position partially early on to reduce the position and leverage used by a trader.

Total liquidation: Closing a position nearly all of the initial margin of a trader has been used.