A liquidation squeeze is a market condition where a rapid decline in asset prices triggers a cascade of forced liquidations. As prices fall, leveraged positions are automatically closed to meet margin requirements, which in turn pushes prices down further, creating a self-reinforcing cycle. This phenomenon is particularly pronounced in markets with high leverage, such as those for certain digital assets and derivatives. Recognizing a liquidation squeeze is important for understanding sudden, sharp price movements in cryptocurrency markets.
Context
Liquidation squeezes are a recurring feature in the volatile digital asset markets, often exacerbated by the use of high leverage in derivatives trading. Recent market events have seen significant price drops fueled by these cascading liquidations, leading to substantial investor losses. Current discussions focus on the systemic risks posed by widespread leverage, the impact on market stability, and potential mechanisms to mitigate the severity of such events.
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