Recently, someone asked me about liquidation in virtual currencies, and it reminded me of some things worth talking about.

First, the basics: if Bitcoin is $50,000 per coin, and you buy one directly for $50,000, that’s normal trading—nothing special. But leveraged trading is different. With the same goal of buying one Bitcoin, you only need to put up 10% of the money, which is $5,000; the remaining $45,000 is covered by me—that’s ten times leverage. Of course, the money I provide isn’t free—it’s a loan to you, and you’ll have to pay it back later.

At this point, if the market goes your way and Bitcoin rises to $55,000, the increase is only 10%, but your $5,000 principal doubles. Sell and pay back the $45,000, and you’re left with a net profit of $10,000. Sounds good, right? The problem is what happens in the opposite scenario.

Suppose Bitcoin falls to $45,000—only down 10%—but with ten times leverage, your $5,000 principal is basically gone. Then you think you’ll just bet that it will bounce back, and you won’t sell—you’ll hold. But I won’t agree, because the $45,000 I borrowed out is my money—why should we gamble together? I have the right to sell your coins directly and recover my funds. If the sale is slow and the coin drops again to $44,000, then you don’t just lose everything—you’ll also owe me $1,000. This $1,000 becomes your debt. That’s what people call liquidation in virtual currencies.

There’s only one way to avoid liquidation: add more margin. Deposit another $5,000 into the account, so that your total funds plus the coin’s value will again exceed $45,000. Then I’ll be at ease.

But I want to tell a more interesting story. In the past, there were many fake commodity trading exchanges in China. Different from those scam sites that directly fabricate data, these exchanges’ data were all real—but they could still trick investors into losing everything.

The method is actually very simple. For example, take a product with ten times leverage. Its current price is $50,000 per bundle, and there are many traders holding both long and short positions at this price. The exchange has all investors’ position information, knows their account funds, their leverage ratios, and even knows when they’re active.

On a night when the sky is dark and the wind is calm, most people are asleep. The exchange, working with a few big players, has prepared the funds, and then hunting can begin. Why does it have to be in the middle of the night? Because when investors are asleep, they can’t add margin in time.

A few big players go crazy and open long positions overnight, pushing the price directly to $55,000. Those short investors who are fully margined with no cash available end up crossing the line immediately with ten times leverage. They’re still asleep, and they can’t add margin at all—the coin gets liquidated. At that moment, it doesn’t take much money, because most people are asleep. Only a small amount of capital is needed to push the price higher. Then the subsequent liquidations and forced liquidations automatically generate buy orders, which actually helps the big players keep pushing the price up.

As the price continues to rise, those investors who left a little capital behind and whose leverage is only nine times or eight times also start getting liquidated. With just a small amount of money, the big players can sweep everything up and roll the snowball to blow up various leveraged shorts.

Suppose it moves from $50,000 to $75,000—then anyone short with more than five times leverage gets liquidated. Where does the liquidation money go? If the big player is also using ten times leverage, and they close from $50,000 to $75,000, their pure profit can be 4 times.

Even more impressive: after the big players finish off the shorts, they can do the opposite. Now they go crazy opening shorts, dumping and pressuring the price down. Because the move from $50,000 to $75,000 was driven by the big players themselves, there won’t be much follow-through from the crowd. When they dump shorts at $75,000 and smash the price back to $50,000, it’s not hard. Then they increase the capital again and do the reverse move a second time, smashing from $50,000 down to $25,000. This time, the longs with more than five times leverage get liquidated again. The big player buys and closes their positions, finishing the harvest.

All the trades are real; it’s just that the big players have far more capital than retail traders. On top of that, by controlling the trading data of retail traders and knowing your entry price, your position, your leverage ratio, and even when you stop being active—this is how, no matter whether retail traders go long or short, they all end up liquidated, while the big players walk away with a full bowl and overflowing profits.

Of course, the story above is about those unregulated, unscrupulous exchanges. With something as legitimate as Bitcoin, how could there be big players? How could 20% of people control 80% of the funds? And with Bitcoin being so secure, how would any wallet or exchange use your trading data to trick you? So liquidation in virtual currencies must be the normal situation in the market—it can’t involve any shady plots.

If you want to make progress in the coin world but still feel a bit confused, there are things you can look at in my page introduction. We can exchange ideas with each other. I’ll participate with everyone in laying out opportunities in contracts and spot. But don’t come right away asking me which coin I like, or how to make quick money—those questions I truly can’t answer. I hope our meeting can always stay the way it was at the beginning.