What is account burning? A detailed explanation of leverage and trading risks

During recent Tet celebrations, while everyone gathered with family, a seemingly simple question with many complex aspects was asked: “What is account liquidation?” This is not just a question from outsiders; it also reflects a shift in public perception of the cryptocurrency market. Last year, when statements from famous figures had a strong impact on the market, many people became curious about crypto trading, leading to numerous questions like this in family conversations.

To understand what account liquidation is, we first need to distinguish between two main types of transactions in the cryptocurrency market: spot trading and contract trading. This difference is key to understanding why one can lead to total asset loss, while the other only causes normal losses.

The Difference Between Spot Trading and Contract Trading

When you perform spot trading, you simply use your own money to buy a cryptocurrency. For example, if you have 10,000 yuan, you can buy Bitcoin worth 10,000 yuan. If Bitcoin’s price increases by 10%, you make a profit of 1,000 yuan. Conversely, if the price drops by 10%, you lose 1,000 yuan. Your total assets decrease to 9,000 yuan, but your account does not “liquidate” — meaning you still own the remaining Bitcoin.

This mechanism is similar to buying stocks on the traditional stock market. Your maximum loss is limited to your initial investment. This is the safest type of trading because your assets are protected by the natural limit of your initial capital.

How Leverage Works and Why Profits Can Increase Tenfold

Contract trading operates on a completely different mechanism. Here, the exchange allows you to open positions with “leverage” — meaning you borrow money to amplify your trading capital. Suppose you still have 10,000 yuan, but you open a contract with a 9x multiplier. The exchange then lends you 90,000 yuan, making your total trading capital 100,000 yuan.

This sounds great: when Bitcoin increases by 10%, instead of earning 1,000 yuan, you now earn 10,000 yuan — a tenfold profit! These impressive numbers attract many to contract trading without realizing the hidden risks.

But this is where the story becomes concerning. Along with the profit increasing tenfold, your losses when the market moves against you also increase tenfold. If Bitcoin drops by 10%, instead of losing 1,000 yuan, you lose 10,000 yuan — exactly your entire actual capital.

The Forced Liquidation Mechanism: When Does Account Liquidation Happen?

This is the most important point: when your losses reach the amount of your initial capital (10,000 yuan), the exchange will trigger a mechanism called “forced liquidation.” This process automatically activates to protect the exchange from further debts.

When liquidation occurs, the exchange will forcibly close your position, recover the entire 90,000 yuan they lent you, and you will have nothing left. Your assets drop to zero — this is account liquidation. You have lost not only your expected profit but also your original capital of 10,000 yuan.

Notably, this process happens very quickly, especially in highly volatile markets. You can go from a profit position to account liquidation within the same afternoon.

Why Are Exchanges Willing to Lend You Money?

You might wonder: if contract trading is so dangerous, why do exchanges still readily lend money to users? The answer is simple: because it generates enormous profits for the exchanges.

When your trading capital increases tenfold, your trading volume also increases tenfold. The trading fees you pay to the exchange also increase tenfold. Moreover, the exchange bears no risk when lending you money because they have established the forced liquidation mechanism. When you get liquidated, they don’t lose anything — in fact, they even earn trading fees from your entire process.

This is why exchanges have a strong incentive to encourage users to use leverage. The profit from trading fees generated by large leveraged positions is irresistible.

Lessons on Risks and Capital Management

Account liquidation is not an accident; it is an inevitable consequence of using leverage without fully understanding the risks. While spot trading allows you to assess risk relatively easily — your maximum loss is your initial capital — contract trading adds a layer of complexity: the risk is not only losing profits but also losing your entire principal.

Last year, as the cryptocurrency market became hotter than ever, the number of people experiencing account liquidation increased significantly. It’s not because they are not smart, but because they do not fully understand the mechanics of contract trading and its hidden risks.

Therefore, before entering the world of contract trading, everyone must be aware: what is account liquidation, how does it happen, and how to avoid it. The first step to protection is understanding.