Liquidation is the forced closure of a trading position by the exchange. It happens when the collateral backing a leveraged position, the margin, falls below the level required to keep it open. The position is taken over by the exchange's risk engine and closed at market. The trader loses part or all of the margin.
The word is also used for the dollar value of such closures. When sites report $500M of liquidations, they mean the notional value of positions force-closed over a period, not money that vanished.
01When it happens
Every leveraged position has a maintenance margin requirement, a minimum margin fraction set by the exchange. Your position is marked to market continuously, usually against the mark price rather than the last traded price. If your margin ratio drops to the maintenance level, the engine acts. There is no negotiation and no grace period.
Higher leverage brings the liquidation price closer to entry. A 10x position on BTC can be liquidated on a move of roughly 9% against it before fees. A 100x position needs less than 1%.
02What the trader loses
The engine closes the position and charges a liquidation fee, typically between 0.5% and 2% of notional depending on the exchange and the margin tier. Whatever remains of the margin after the close and the fee is returned. If the price gaps through the position faster than it can be closed, the loss can exceed the account balance on cross margin, though the insurance fund usually absorbs that difference.