Liquidation Wave
In short: A liquidation wave happens when liquidation transactions pile up one after another and cause sudden, sharp price changes.
A liquidation wave happens when liquidation transactions pile up one after another and cause sudden, sharp price changes. It is also known as a liquidation cascade.
Why it matters
Leveraged traders and borrowers on lending platforms back their positions with collateral, and those positions are closed automatically if prices move too far against them. Each forced closure usually buys or sells at the market, which pushes the price further in the same direction and can trigger the next round of liquidations. The result is a move that is faster and deeper than ordinary trading would cause, especially in markets with thin liquidity.
Example
Imagine many traders hold leveraged long positions on the same coin. A modest price drop liquidates the most highly leveraged ones, and their positions are sold into the market. That selling pushes the price lower, which liquidates the next group, and the chain continues until enough buyers step in. The same chain reaction can run upward when many short positions are forced to buy back, which is one cause of a short squeeze.