A few days ago, on the occasion of the Lunar New Year, I was "kidnapped" by a relative to discuss topics I really didn't want to talk about. The question was: what is account liquidation? Hearing that, I shivered and almost dropped my cigarette. Why? Because it’s a pain I know all too well.

But he was so persistent, following me wherever I went, that in the end I had to give in. He said he had thought about it for a long time but still couldn’t understand why, even after buying cryptocurrencies the most, you only lose money, and how it’s possible for an account to be wiped to zero. Clearly, he was confusing the crypto market with the stock market.

I put out my cigarette and started explaining. First, I asked him, "If you have 10,000 yuan, can you buy Bitcoin worth 10,000 yuan?" He nodded. "When Bitcoin goes up 10%, you make 1,000 yuan, right?" He nodded again. "When Bitcoin drops 10%, you lose 1,000 yuan?" "Exactly." I said, "That’s called spot trading, just like buying stocks, and it won’t wipe out your account."

Then I moved to the main part. "Account liquidation happens when you trade contracts with leverage. For example, you still have 10,000 yuan, but open a position with 9x leverage. The exchange will lend you 90,000 yuan, making your total capital 100,000 yuan. Now you can buy Bitcoin worth 100,000 yuan."

He started to find it intriguing: "If Bitcoin goes up 10%, I make 10,000 yuan!" I nodded: "Exactly, your profit increases tenfold. But..." I paused, "...if Bitcoin drops 10%, you also lose 10,000 yuan. Your actual capital is wiped out."

"Why does the exchange lend you money?" he asked. "Because they earn trading fees from you. If trading volume increases tenfold, fees also increase tenfold. Moreover, they have no risk. When you lose all your actual capital, they will automatically liquidate and cut losses."

“That’s what account liquidation is — when your losses reach your actual capital, the exchange will force a liquidation, meaning you lose all your initial 10,000 yuan, and the loan from the exchange is recovered. Your capital drops to zero.”

He was stunned, mouth agape, unable to close it, eyes flickering with greed, fear, and confusion. I knew at that moment, a new door had opened in his mind, and it could no longer close as it did before.