cascadeeffect

How leverage liquidations drive crypto prices 🚀💥

Leverage basics:
Traders can open positions larger than their own capital using borrowed money from the exchange.
Example: You have $1,000 but open a $5,000 long position (×5 leverage).

Automatic liquidation:
If the market moves against a leveraged position, losses accumulate faster than the trader’s own funds.
When losses reach a certain threshold, the exchange automatically closes the position to prevent further loss.

Effect on price:
Short liquidation: Traders betting on a drop get liquidated → exchange buys the tokens → price rises faster.
Long liquidation: Traders betting on a rise get liquidated → exchange sells the tokens → price falls faster.

Cascade effect:
When many leveraged positions exist on the same side, the first liquidations push the price, causing other positions to hit their liquidation thresholds.
Each subsequent automatic buy or sell further moves the price, creating a chain reaction, or cascade.

Impact on volatility:
These cascades amplify price swings far beyond what normal trading would produce.
Leverage acts like fuel for the market — the more leverage, the stronger the swings.

💡 Takeaway: Credit from leverage and liquidations is what powers extreme movements in crypto prices. Understanding this mechanism helps you see why markets can move so fast in both directions.

#CryptoMechanics #Liquidations #MarginTrading #CascadeEffect #PriceVolatility