Definition ∞ Leverage Unwinds describe the forced closure of leveraged trading positions in financial markets, typically triggered by significant price movements against the trader’s position. When an asset’s price drops below a certain threshold, exchanges automatically liquidate positions to cover potential losses, a process known as a margin call. These events can exacerbate market volatility, leading to cascading liquidations and sharp price declines. This is particularly relevant in highly volatile crypto markets.
Context ∞ Crypto news frequently reports on Leverage Unwinds, especially during periods of rapid market corrections, as they can amplify downward price pressure. Analysts closely monitor funding rates and open interest in derivatives markets for signs of excessive leverage, which often precedes these liquidation cascades. Understanding leverage unwinds is crucial for comprehending market instability and the mechanics of sharp price drops in digital asset trading.
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