Bitcoin doesn't need to fall by 20% for billions of dollars in leveraged positions to disappear as well.
When traders use high leverage, a decline of just a few percentage points in price can be sufficient. Leverage allows traders to control positions that are much larger than the actual cash they have deposited, but this also means that there is less room for the market to move in the opposite direction.
When losses cause a trader's margin to fall below the exchange's maintenance margin requirement, their position may be automatically closed. If many traders hold positions in the same direction at similar prices, these forced closings can amplify the original trend and trigger a chain reaction of liquidations.
How leverage makes small fluctuations in Bitcoin dangerous
Assume a trader deposits $1,000 and uses 10x leverage to open a long position in Bitcoin worth $10,000.
A 1% drop in Bitcoin would result in a reduction of about $100 in the value of that position, which is equivalent to 10% of the trader's initial margin. With a leverage of 20 times, the same market fluctuation would have approximately double the impact on the trader's capital.
Therefore, with very high leverage, a small decline could push a position towards liquidation.
The calculations here are simplified results, as the actual settlement levels also depend on maintenance margins, transaction fees, and the exchange's pricing methods.
What will happen in a chain reaction of liquidation?
When a leveraged long position reaches the liquidation threshold, the exchange will begin to reduce the position or close it out.
This will actually increase selling pressure when Bitcoin has already started to decline.
If a sufficient number of long positions are concentrated at similar prices, the initial decline could trigger a wave of liquidations. These forced sales will further push down the price of BTC, thereby affecting the next batch of traders using leverage.
This process may lead to self-reinforcement:
BTC falls → Long positions are liquidated → Forced selling increases → BTC falls further → More liquidations
This is also why, during periods of volatility, a larger open interest position size is quite important. Open interest measures the value of unsettled derivative positions; therefore, abnormally high levels may indicate that a significant amount of leverage is still in operation.
Why does the liquidation amount reach several billion dollars?
The total amount of liquidation mentioned in the report refers to the value of the closed positions, not just the cash deposited by traders.
If someone uses $10,000 in collateral to control a position worth $100,000, then when that position is closed out, the amount involved in the settlement could be close to $100,000.
If this mechanism is applied to hundreds of altcoins on Bitcoin, Ethereum, and major derivatives exchanges, the numbers will increase rapidly.
Coinpaper has seen this phenomenon multiple times during periods of sharp declines in Bitcoin: initially, there was only a relatively mild decline, but it was followed by liquidations of cryptocurrencies worth over $1 billion.
Another round of leverage liquidation also revealed the same mechanism: once the main support level is broken through, forced liquidations will accelerate the downward trend of the market.
