Bitcoin fell nearly $2,000 in a matter of hours today, liquidating “long positions” worth nearly $200 million.
Liquidations occur when leveraged positions are automatically closed by exchanges/brokers as a “safety mechanism”. Futures and margin traders-who borrow capital from exchanges to place larger bets – invest a small margin before placing a trade.
When the cash market falls, the futures positions also fall, triggering predetermined levels of liquidation, which differ depending on the level of leverage used and margin. This creates a kind of cascade effect, which leads to a sharp, sudden slump… and unpleasant consequences.