🌟🌟What is liquidation?
In futures or margin trading, traders use 'leverage' to open positions worth more than their actual capital. For example, with 10x leverage, a trader can control a $1,000 position with only $100 of their own capital.
If the price of the asset (in this case XRP) moves against the trader's position (i.e., the price drops for long positions or rises for short positions) and the trader's account balance reaches a certain level (called 'Maintenance Margin'), the trading market automatically force-closes the trader's position to prevent further losses for the trader and the platform. This process is called 'liquidation.'
🌟🌟Why did this happen to XRP?🤔🤔
According to recent news, XRP experienced a quiet rise earlier, prompting many traders to open high-leverage long positions (betting on the continuation of the rise). Then a sudden and sharp price reversal occurred, dropping rapidly, albeit by a relatively small percentage, but this decline was enough to trigger stop-loss orders and liquidate a massive number of high-leverage positions.
Nearly $474,000 in long bets were wiped out in one hour, while short liquidations were minimal (around $65), confirming that the damage was almost entirely focused on traders betting on the rise.
🌟🌟Impact:
🔥Significant losses for traders: High-leverage traders who were in long positions suffered substantial and unexpected losses.
🔥Increased volatility: Liquidation of large numbers of positions increases market volatility, as forced closures of trades lead to additional selling pressure, pushing the price down further and leading to more liquidations (cascade effect).
🔥Indicator of over-exaggeration: Such events often indicate that the market was 'over-exaggerated' on one side (in this case, many traders were expecting a rise), and a quick correction was necessary.
🔥XRP was not the only one: Although XRP stood out due to the concentration and volume of liquidations in a short time, the overall cryptocurrency market also witnessed significant liquidations during the same period, with Bitcoin and Ethereum also affected by the liquidation of long positions.
Overall, the mentioned massive ratio indicates that the vast majority of liquidations in that hour were directed against long positions (betting on price increases), causing substantial losses for the affected traders and highlighting the high volatility in the cryptocurrency market 🥱🥱🥱.
