📉 Why Do Crypto Prices Fall So Fast? Do you want to know why you are seeing everything in red?
Hello everyone! 👋 If you have ever seen the price of a cryptocurrency plummet in a matter of minutes, it is very likely that you have witnessed the effect of a liquidation. This is one of the most powerful and often misunderstood phenomena in the market.
What is a Liquidation?
In simple terms, a liquidation occurs when a trader who is operating with leverage (borrowed money) does not have enough capital to cover their losses. To protect the lender, the platform automatically closes the trader's position.
* Example: If you use 10x leverage and the price of the asset moves 10% against you, you lose 100% of your capital. At that moment, the platform liquidates you, selling your position to recover the borrowed money.
The "Cascade" Effect and Price Drop
A liquidation rarely occurs in isolation. When a large number of leveraged positions are liquidated at the same time, a domino effect is generated, known as a cascade of liquidations.
* The massive sell-off caused by these liquidations pushes the price of the asset down.
* This price drop causes other leveraged positions, which were about to be liquidated, to also be liquidated.
* More liquidations mean more sales, which accelerates the price drop and generates panic in the market.
It is this "snowball" effect that can turn a small price correction into a drastic and rapid drop, leaving unsuspecting investors with significant losses.
Remember: This phenomenon is the main reason why beginners are warned about the dangers of leverage. Liquidation is not only a threat to the leveraged trader but also a catalyst for the volatility of the entire market.
What do you think? Did you know the power of this phenomenon?