Large crypto liquidations in the last 24 hours, about 410 million dollars

In the last 24 hours there have been large liquidations on the crypto market. 

According to Coinglass data, almost 165 million dollars of long positions were liquidated, and more than 240 million dollars of short positions. 

In total, almost 410 million dollars of long or short positions were liquidated. 

The liquidations

A long position is a bet on the price of an asset going up, while a short position is a bet on it going down. 

To prevent any excessive losses from eroding the entire invested capital and generating further losses (which would create a debt), such positions are automatically closed by the platforms before the capital is completely eroded, in case of such risks.

In these cases they are true forced liquidations that turn out to be absolutely unavoidable if the losses risk becoming excessive.

Obviously, if such positions do not generate excessive losses, or are even in profit, they are not liquidated, unless the investor has set an automatic take-profit (TP) at a specific price. 

Therefore forced liquidations, caused by losses, must be distinguished from automatic closing of profitable take-profits. 

Volatility and forced liquidations

If long or short positions are leveraged, the risk of them being liquidated increases significantly. 

A leveraged position is in fact based on a loan, which must however always be repaid in full including interest. Precisely to prevent the invested capital from no longer being able to repay the loan, or pay the interest, when the losses accumulated by a long or short position are excessive, the position is automatically forcibly liquidated by the platform. 

The higher the leverage, the more money has been borrowed, and the easier it is to be liquidated. 

Therefore when there are forced liquidations, the first to be liquidated are those with higher leverage (25x, 50x, or sometimes even 100x or more), while those with lower leverage (10x or even less) are liquidated later, because their liquidation prices are further away from the price at which they were opened. 

However, since this logic applies equally both to long positions (i.e. bullish) and to short positions (bearish), just a bit of volatility in both directions is enough to generate forced liquidations of both. 

Thus, with crypto prices having alternately both risen and fallen over the last 24 hours, there have been forced liquidations of both long and short positions. 

Bitcoin

For example, on Friday at the close of traditional markets the price of Bitcoin was about $80,000.

However, between yesterday and last night it suddenly jumped to over $82,000, causing many short positions opened at Friday’s prices to be liquidated. 

Later, however, it fell back below $81,000, causing long positions opened a few hours earlier above $82,000 to be liquidated as well.

However, since the price swing was decidedly small (3.7% volatility), almost exclusively highly leveraged positions were liquidated. 

For example, by opening a short position at $80,000, the price at which forced liquidation would be triggered is above $87,000. By increasing leverage to 25x, however, the forced liquidation price drops to just over $83,000, while with 50x leverage it falls below $82,000.

So last night it was mainly short positions with 30x leverage or more that were liquidated. 

For those who instead opened long positions at $82,000, with 25x leverage the liquidation price would be well below $79,000, so only those with 50x leverage or more were liquidated. 

All this explains both why both long and short positions were liquidated, and why there were more liquidations of short positions.

How to avoid it

There are only three ways to avoid forced liquidations. 

The first is to use very low leverage, or no leverage at all. This does not prevent forced liquidation, but it pushes the liquidation price much further away. 

The second is to use stop-losses (SL), to automatically liquidate the position, at a loss, before the forced liquidation price is reached. The advantage is that in this way only part of the invested capital is lost, and not all of it as during a forced liquidation. 

The third, and also the most obvious, is to open long or short positions at a good price, meaning as low as possible in the case of longs, or as high as possible in the case of shorts. Even in this case the risk of forced liquidations does not drop to zero, but it is greatly reduced.