Leverage-Induced Liquidation

Leverage-induced liquidation is a process where a trader's position is automatically closed by an exchange because the account equity has fallen below the required maintenance margin. This is a common feature in crypto derivatives, where high leverage is readily available.

When a large number of positions are liquidated simultaneously, it can trigger a cascading effect, forcing prices further in the direction of the liquidations and creating massive volatility. This is known as a "long squeeze" or "short squeeze." Understanding the levels where liquidations are likely to occur is critical for risk management and identifying potential market turning points.

These events are a direct result of the interplay between leverage, margin requirements, and market microstructure.