#Liquidity101

◾Liquidation in the crypto world refers to the forced sale of a position in cryptocurrencies due to a lack of funds to maintain it when trading with leverage. This can occur when the market moves against a position and the trader does not have enough margin to cover potential losses.

📌What causes liquidations in cryptocurrencies?

-Margin calls: When the value of a position falls below a certain level, the exchange may issue a margin call, requiring the trader to deposit more funds to avoid liquidation.

-Extreme volatility: Rapid and significant movements in the price of cryptocurrencies can trigger liquidations, especially for traders with leveraged positions.

-Lack of liquidity: Illiquid markets can cause disproportionate price changes, which can trigger liquidations.

-Technical failures: Errors in trading platforms can prevent traders from closing positions in time or liquidating them based on inaccurate data.

📌Impact of liquidations in cryptocurrencies

-Financial losses: Liquidations can result in significant losses for traders, especially those with leveraged positions.

-Domino effect: Liquidations can trigger a domino effect, causing rapid and drastic price drops in the market.

-Impact on market confidence*: Large-scale liquidations can deter new investors and traders from entering the market, leading to reduced liquidity and increased volatility.

📌Examples of liquidations in cryptocurrencies

-On June 5th, a massive liquidation of over $1 billion in leveraged trader positions marked the day, following a sharp drop in the price of Bitcoin.

-In March 2020, the cryptocurrency market experienced a drastic drop, leading to liquidations worth more than $1 billion.