Liquidation cascade
When traders are forced out of leveraged positions, how can one wave of forced closures set off the next?
In plain words
A liquidation cascade happens when a leveraged trader's position is closed by the exchange because losses have eaten the collateral. Those forced sales push the price down, which can push other traders past their own limits, closing their positions too. The process can also run in reverse when shorts are forced to buy back.
Why it matters
In a cascade, price moves are driven by position closures rather than new information, so moves can be larger and faster than a market's normal trading would produce. For anyone holding a position, the depth and speed of the move matter as much as its direction, because a forced closure is not a choice made at a comfortable price.
In a real week: ETH, week of 7 April 2025
ETH opened the week of 7 April 2025 at 1580.77, dropped to a low of 1385.05 early Wednesday at 01:00 UTC, then reversed to a high of 1689.0 late Wednesday at 21:00 UTC — a weekly range of 21.95%. Wednesday's single largest hourly move was +8.67% at 17:00 UTC, and the day closed up 13.31%. Over the whole week, ETH traded 11.75bn dollars of volume, above its prior 12-week average. Average eight-hour funding was near zero at 0.0005%, dipping to -0.0066%.
A common mistake
Reading a sharp reversal as proof of a cascade. Large hourly moves and heavy volume are consistent with forced closures, but the price data alone cannot show how much of the move came from liquidations.