Recently, someone asked me how leverage trading actually works and also wanted to understand the meaning of liquidation. Actually, the concept is not complicated, but the risks are indeed significant. Let me explain.

First, the basics. If Bitcoin is $50k each, and you buy one directly, that’s a regular trade. But leverage trading is different. You only need to put up 10%, which is $5,000, and I’ll cover the remaining $45,000 for you. That’s tenfold leverage. Of course, the money I lend you isn’t free—you have to pay it back later.

If Bitcoin rises to $55k, a 10% increase, and you sell and pay me back $45,000, you keep a net profit of $10k. That’s like doubling your $5,000 principal. Sounds great, right? But what if the opposite happens? If Bitcoin drops to $45,000, a 10% decrease, with tenfold leverage, your $5,000 is wiped out immediately. At this point, you might think, “Price will bounce back, I’ll hold and not sell.” But that’s not feasible. The money I lent you is my own. Why would I hold out with you? If the price doesn’t recover, what do you have to pay me back? So I have the right to sell your position directly and take my $45,000.

Even worse, if the market drops quickly and Bitcoin falls to $44,000, after I sell, not only are you wiped out, but you also owe me $1,000. That $1,000 becomes your debt, which you must repay. This is liquidation. Many people hear “liquidation” and get scared. But it simply means your losses exceed your initial investment, and you owe the exchange money.

The only way to avoid liquidation is to add margin. For example, you deposit an additional $5,000 into your account, so your total cash plus Bitcoin’s value exceeds $45,000 again, reducing the risk.

Now, I want to share a real story. There have been many fake exchanges in China—not fake data, but all trades are real—yet they still managed to wipe out investors’ funds. The method is actually quite simple.

Suppose there’s a tenfold leverage product, with the price at $50k. The exchange knows all investors’ positions, funds, and leverage ratios—this is insider information. On a dark, windy night, the exchange teams up with large traders and prepares a lot of capital to start. Why at night? Because most investors are asleep and won’t notice market movements or be able to add margin in time.

Several large traders go all-in on the long side, pushing the price up to $55,000. Short sellers with no cash and tenfold leverage get liquidated instantly while sleeping. It doesn’t cost much because most people are asleep. Then, the short positions are automatically liquidated, creating buy orders that help the big traders push the price even higher.

As the price continues to rise, investors with nine or eight times leverage also start to get liquidated. The big traders only need a small amount of capital to keep rolling the snowball, crushing various leveraged short sellers. For example, if the price rises from $50k to $75k, all short positions with more than five times leverage are liquidated. The money from these liquidations? Assuming the big traders also use tenfold leverage, they can make a fourfold profit from the move from $50k to $75k.

Even more impressive, after pushing the price up, the big traders can reverse their strategy. They start shorting aggressively, dumping assets to push the price down. Since the price from $50k to $75k was driven up mainly by the big traders themselves, with little retail participation, it’s not hard to push it back down. If they smash it down to $25k, all the retail traders with more than five times leverage who went long at $50k get liquidated again. The big traders buy back at the lower price and harvest the profits.

All these trades are real, but they require much larger capital than retail traders have, plus insider knowledge of retail traders’ positions, leverage, and trading activity. Knowing when retail traders are inactive allows them to target precisely. Retail traders get liquidated whether they go long or short, while the big traders profit handsomely.

This story describes unregulated, unscrupulous exchanges. Of course, legitimate exchanges wouldn’t do this. But I recommend everyone understand what liquidation is and the risks behind it. Leverage is a double-edged sword—it can amplify gains but also magnify losses. If you want to develop seriously in the crypto space, I have some experience sharing on my homepage. Feel free to reach out. But don’t just ask if a certain coin can make money—that’s not something I can answer easily. I hope we can always keep our discussions rational and clear.