Leverage unwinding describes the forced or voluntary closure of highly leveraged trading positions. This process occurs when market prices move unfavorably against positions taken with borrowed funds, leading to margin calls or liquidations. Traders are compelled to reduce their exposure by selling assets, which can exacerbate price declines. It often triggers a cascading effect, intensifying market volatility and further price depreciation.
Context
Leverage unwinding is a significant factor in cryptocurrency market corrections, as it amplifies downward price movements during periods of high volatility. News reports frequently cite this phenomenon as a cause for sharp sell-offs, particularly in derivatives markets. Market participants closely monitor funding rates and open interest to assess the potential for such events.
The crypto market experienced a significant drop, influenced by stronger-than-expected US GDP data, an upcoming inflation report, and a large $23 billion options expiry, creating uncertainty for investors.
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