Liquidation Definition
In the realm of blockchain and cryptocurrency, liquidation refers to the process of converting a digital asset or token into cash or an equivalent asset. This is oftentimes done by selling off the asset through an exchange or in a peer-to-peer transaction. The term is also commonly used in the context of margin trading on blockchain platforms, where a trader’s assets may be liquidated, or sold off, usually at a significant loss, if their account falls below a certain level known as the “margin maintenance.”
Liquidation Key Points
- Liquidation involves converting a digital asset into cash or a similar asset.
- These processes often occur through an exchange or a peer-to-peer transaction.
- In margin trading, if an account falls below a certain threshold, typically the margin maintenance, the assets may be liquidated.
Who
Anyone who owns digital assets like Bitcoin, Ethereum, or any other blockchain-based token can engage in liquidation. It’s also a risk faced by traders who use margin to leverage their positions in such assets.
What
Liquidation refers to the process of transmuting a digital asset or token into a more liquid form, typically cash or a cash equivalent. This can either be a voluntary act aimed at cashing out an investment or making use of the value of that asset or can be a forced action in the case of margin trading.
When
Liquidation can occur anytime depending on the asset holder’s needs or the market conditions. The forced liquidation in margin trading usually occurs when the market moves against a trader’s position and their account value falls below the specified margin maintenance level.
Where
Liquidation usually takes place on digital asset exchanges where assets can be sold for other cryptocurrencies or fiat money. P2P transactions or decentralized exchanges (DEXs) can also facilitate liquidation, providing avenues for direct trades between parties.
Why
People might choose to liquidate their assets for a variety of reasons including to realise profits, to access funds for personal use, or to re-invest in other assets. Forced liquidation is done to limit the potential losses of the lender in margin trading.
How
Voluntary liquidation involves selling off the asset on an exchange or in a direct transaction with another party. Forced liquidation in margin trading typically involves the trading platform automatically selling off the trader’s assets to bring the account value back above the margin maintenance level.
