Short liquidation risk is the hazard faced by traders holding short positions in cryptocurrency derivatives markets when the price of the underlying asset rises significantly. If the asset’s price increases beyond a certain threshold, a trader’s short position may be automatically closed by the exchange to prevent further losses, resulting in a forced buy-back. This risk is amplified by leverage and can lead to substantial capital losses. It is a critical consideration for derivative traders.
Context
News reports often highlight short liquidation risk during periods of unexpected price rallies in cryptocurrencies, particularly when funding rates are negative or short interest is high. Large-scale liquidations can create a “short squeeze,” further accelerating price increases. Understanding this risk is essential for traders to manage their exposure and for analysts to assess potential market volatility and price movements.
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