🍌 What should beginners know about liquidations?

⚫️ We’ve already written about scams in the crypto world. But there are also situations where everything is legal, yet you can still lose your funds. And at first, it may not be entirely clear why. In today’s #howtoton segment, we’ll explain one such case: liquidations.

⚫️ Losing money in crypto might seem easy—buy Toncoin, and if it drops in price, you’re at a loss. So what else is there to worry about? The key difference is that price drops can be temporary, but liquidations mean losing your asset permanently. Why does this happen, and where can you encounter it?

⚫️ Imagine a user expects Toncoin’s price to rise and buys $100 worth of it. If they’re wrong and TON drops by half, it’s unfortunate, but not necessarily a total loss—they can wait for a rebound (historically, TON has rewarded patient holders) or withdraw $50 to lock in a partial loss.

⚫️ Instead, the user might choose to trade Toncoin on a platform with leverage—say, 3x. This means their $100 position is tripled with borrowed funds. If they’re right and TON rises, their profit is magnified. But if the price falls, the platform starts risking its own money. Once a certain price threshold is reached, the platform will liquidate the position—closing it and keeping the user’s initial $100 as repayment. In this case, the entire amount is lost permanently.

⚫️ Liquidations aren’t limited to trading. They can also happen on lending platforms, where users borrow one cryptocurrency using another as collateral. For example, if you borrow USDT against your Toncoin holdings and TON’s price drops too much, the collateral might no longer be enough to cover the loan. In this case, the platform may liquidate the collateral, meaning you lose it—though you would still keep the borrowed USDT.

⚫️ Another example is decentralized stablecoins, which we’ve discussed before. The idea is similar: these stablecoins are issued against crypto collateral, and the value of that collateral must always exceed the amount of stablecoins in circulation. If it doesn’t, the stablecoin loses its backing, and its peg to another asset collapses. That’s why platforms often display a health factor, which shows how close a user is to liquidation and whether they should increase their collateral to avoid it.

💡 What should beginners take away from this?
At first, it’s best to avoid any operations that carry liquidation risks and stick to safer alternatives. If you decide to experiment, start with small amounts you can afford to lose. Always assess the risks carefully, understand what you’re doing, and choose a risk level that suits you. Many experienced traders advise, “If you’re using leverage, keep it low—something like 2x at most.”

@thedailyton