Deleveraging
What does it mean when a market sheds borrowed exposure, and why does that push prices down fast?
In plain words
Deleveraging is the process of closing or being forced out of leveraged positions, meaning positions partly funded with borrowed money. It usually happens after a fall triggers margin calls and liquidations, so traders sell to reduce or exit, adding further selling pressure.
Why it matters
Leverage turns a modest price move into a chain of forced exits. Once it begins, the selling reflects position closures rather than new views on value, and the resulting price drops can exceed what fresh information would justify.
In a real week: BTC, week of 6 June 2022
In the week of 6 June 2022, BTC fell 11.18%, opening at 29919.2 and closing at 26574.53, in the lower third of the week range near the low of 26560.0 set on Sunday. Dollar volume of 15.68 billion ran 1.1 times its prior 12-week average, and the largest hourly move was -3.75% on Tuesday. Three of the four prior weeks were down, and the 8-hour funding rate touched -0.0102%.
A common mistake
Reading lower prices plus heavy volume as conviction that a market should fall further. During deleveraging, volume largely reflects positions being closed, which can exhaust itself.