Leverage Exhaustion

Leverage exhaustion occurs when market participants who have borrowed capital to amplify their positions are forced to liquidate or reduce their holdings due to adverse price movements or margin requirements. In the context of cryptocurrency and derivatives, this often happens when a sudden, sharp price reversal triggers a cascade of margin calls.

Because these traders have no additional collateral to maintain their positions, the protocol or exchange automatically sells their assets to cover the debt. This selling pressure further depresses the asset price, potentially triggering more liquidations in a feedback loop known as a long or short squeeze.

It is a critical indicator of market fragility and signals that the speculative froth has been removed from a specific price level.