Leveraged liquidation occurs when a trader’s position, opened with borrowed funds, is automatically closed by an exchange or protocol due to insufficient collateral. This happens when the market price moves adversely against the leveraged position, causing the margin level to fall below a required threshold. It is a mechanism to prevent further losses for the lender. This protects lenders from insolvency.
Context
Leveraged liquidations are common events in volatile cryptocurrency markets, often amplifying price swings and contributing to cascade effects. News reports frequently cover large-scale liquidation events, which can signal market capitulation or significant shifts in market sentiment among highly leveraged traders, influencing overall market direction.
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