How to Read Crypto Liquidations
Understand crypto liquidations: what they are, the difference between long and short liquidations, and how liquidation cascades drive volatility.
What a liquidation is
A liquidation is when an exchange force-closes a leveraged position because the trader's margin can no longer cover the loss. The position is closed at market and the trader loses their margin. At high leverage the liquidation price sits very close to entry.
Long vs short liquidations
Long liquidations are over-leveraged buyers wiped out when price falls. Short liquidations are sellers wiped out when price rises. A big one-sided spike often marks a local extreme — a flush of long liquidations can mark a bottom, a wave of short liquidations can fuel a rally.
Liquidation cascades
Liquidations act like fuel. When price hits a zone packed with leverage, the forced orders push price further, triggering more liquidations — a cascade. Watching where leverage is heaviest helps you avoid the crowded trade.
Use it with the rest
Pair liquidations with funding and open interest: a drop in open interest usually follows a cascade as leverage is flushed.
FAQ
What causes a liquidation?
A position is liquidated when price moves against it far enough that the margin can no longer cover the loss, so the exchange closes it automatically.
Are long or short liquidations bullish?
A spike of long liquidations (on a drop) can mark a local bottom; a spike of short liquidations (on a rally) can fuel a squeeze higher.
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