Liquidation happens when a leveraged position is forcefully closed by the exchange because the market moved against the trader and their margin is no longer sufficient to cover the losses. Liquidation protects the exchange and lenders from losing money, but it usually wipes out most or all of the trader’s margin.
Example:
A trader opens a $10,000 position on Bitcoin with $1,000 at 10x leverage. If the price drops by 10%, the trader’s margin is used up and the position is liquidated, resulting in the loss of their $1,000.