Liquidity Squeeze

A liquidity squeeze occurs when there is a sudden and severe shortage of liquidity in the market, making it difficult to execute trades without causing significant price impact. This often happens during periods of extreme market stress or panic, where buyers disappear and sellers are forced to hit lower bids.

In crypto markets, this can be exacerbated by the liquidation of leveraged positions, creating a cascade of selling pressure. During a squeeze, spreads widen dramatically, and volatility spikes, often leading to market dysfunction.

Participants must be aware of liquidity depth to avoid being caught in such events, which can result in significant losses for those unable to exit their positions at favorable prices.