The risk of liquidation under 10x leverage: Why high leverage can only be wiped out instantly

Basic Logic of Leverage Trading

Many traders underestimate the risks when engaging in leverage trading. Let’s start with the simplest example to understand.

Suppose the price of Bitcoin is $50,000 per coin. You have two options: the first is to buy one coin directly with $50,000, which is regular spot trading. The second is to use leverage, requiring only $5,000 (10% margin), with the trading platform covering the remaining $45,000. This is tenfold leverage trading.

It sounds very cost-effective, right? But the risks behind it are often overlooked. That $45,000 is not a gift; it’s a loan that you must fully repay when closing the position.

Leverage Amplifies Gains and Losses

If Bitcoin rises to $55,000 (a 10% increase), you sell and repay the $45,000 loan, leaving a net profit of $10,000, which doubles your $5,000 principal. This is the attractive part of leverage.

But the opposite scenario is entirely different. If Bitcoin drops to $45,000 (a 10% decrease), your situation deteriorates sharply. At this point, the entire position value equals the $45,000 you owe the platform, and your $5,000 principal has completely disappeared.

The Moment of Liquidation

You might say, “I believe the price will rebound, I won’t sell.” But the platform won’t let you do that. Your funds can “hold out,” but the platform’s lent capital must be protected. When your account balance is insufficient to cover the loan, the platform has the right to forcibly close your position—that is liquidation.

A worse case is if Bitcoin continues to fall to $44,000 during the liquidation process. Not only do you lose all your principal, but you also owe the platform $1,000. This $1,000 won’t disappear just because you sleep or stop watching the market; it’s a real debt.

Margin Top-up: The Only Way to Avoid Liquidation

The only way to save yourself is to top up your margin. For example, depositing an additional $5,000 into your account, so your cash plus Bitcoin holdings can cover the $45,000 loan again. Only then will your position be maintained. This is often very difficult for retail traders with limited funds.

Systemic Risks in the Trading Environment

Similar risk events have occurred in history. In some loosely regulated trading environments, platforms have access to detailed data on all traders’ positions, funds, and leverage ratios. Large institutional traders or whales might exploit this information to execute large trades during inactive periods (like late at night).

The specific process is: when retail traders are asleep and unable to top up margins, large sums of capital buy into a certain asset, instantly pushing up the price. This triggers stop-losses on short positions, leading to automatic forced liquidations. These forced liquidations then create new buy orders, further driving up the price. As the price surges, more traders with higher margin ratios are liquidated layer by layer.

Through this “snowball” effect, a small amount of capital can trigger a chain reaction. Afterwards, large traders or institutions reverse the operation, dumping the market to push prices down and liquidate long traders again. All trading data is real, but the outcome is very unfavorable for retail traders.

Risk Reminder

This phenomenon reminds us that leverage trading is not just a simple mathematical game. When choosing leverage ratios, sufficient safety margins must be maintained, and it’s crucial to select trading platforms with strong regulatory backgrounds and transparent mechanisms. High leverage seeking quick wealth often results in rapid zeroing out. Trade cautiously and always prioritize protecting your principal.