Market liquidation refers to the forced closing of a leveraged trading position when an investor’s collateral falls below a required maintenance margin, often triggered by adverse price movements. This automatic closure is executed by the exchange or protocol to prevent further losses and protect the lender or platform. Liquidations can cascade, especially in volatile markets, exacerbating price declines. It is a risk management mechanism in leveraged trading.
Context
Market liquidation events are frequently reported in crypto news, particularly during periods of high volatility in digital asset markets, as they can lead to significant price drops and investor losses. Large-scale liquidations on centralized exchanges or decentralized lending protocols often signal market instability or over-leveraging. Understanding market liquidation dynamics is critical for assessing market health and managing risk in digital asset trading.
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