A liquidation wave occurs when a large number of leveraged trading positions are automatically closed out due to rapid price movements. This cascading effect is triggered when asset prices fall below specific margin thresholds, forcing exchanges to sell collateral. Such events can accelerate market downturns, leading to significant price drops and increased volatility. It represents a rapid deleveraging process.
Context
Liquidation waves are often major news events in cryptocurrency markets, signaling periods of extreme market stress and price corrections. Analysts frequently discuss the factors contributing to these events, including excessive leverage and sudden market shocks. Future market structures may see adjustments to margin requirements or circuit breakers to mitigate the impact of such large-scale forced selling.
The crypto market saw a significant $300 billion downturn this week, driven by leveraged position unwinding and a sharp decline in corporate Bitcoin purchases.
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