Liquidation is the process of converting assets into stablecoins, such as USDC, and can occur through either forced or voluntary actions.
Forced liquidation is common in margin trading when a trader's position is automatically closed due to the inability to meet the required conditions for leveraged positions. Leverage, which amplifies market positions, plays a crucial role, and higher leverage results in a narrower liquidation price range. Consider a scenario where a trader wishes to margin trade BTC/USD, borrows $1,000 for a 5x leverage, and experiences a significant price drop. If the market moves unfavorably, the trader may face forced liquidation to protect against further losses.
This forced liquidation process is designed to happen automatically, often before the trader's actual stake is significantly reduced. Platforms like Binance allow users to assess the liquidation price before entering leveraged positions, factoring in position size, account balance, and leveraged amount.
Voluntary liquidation, in contrast, is a deliberate decision by a trader to convert their crypto assets into fiat or stablecoins for personal reasons. This process is not automated and reflects the trader's strategic choices or risk management preferences. Liquidation concepts also extend to futures markets, where traders may strategically convert assets based on market conditions and individual objectives.