Definition ∞ Tightening liquidity in cryptocurrency markets describes a condition where the ease of buying or selling digital assets without significantly affecting their price diminishes. This means there are fewer active buyers and sellers, leading to thinner order books and wider bid-ask spreads. It indicates a reduction in the overall capital flowing through the market.
Context ∞ When liquidity tightens, even relatively small trades can cause substantial price movements, increasing market volatility and slippage. This can be influenced by macroeconomic uncertainty, reduced risk appetite, or large-scale liquidations. For leveraged traders, tightening liquidity heightens the risk of margin calls and forced closures, as positions become harder to exit at favorable prices.
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