A trader with $100 margin opens a 10x short, controlling $1,000 notional. Their liquidation price is $109 (10% against them). Bitcoin reaches $53,000. Liquidation triggers.
The exchange automatically sells the trader's position at market price to recover the collateral. One short closed. But hundreds of other traders are at risk too. Their liquidation prices are nearby.
One liquidation pushes Bitcoin up $500. Now 50 more shorts at $53,500 liquidate. Their sell orders hit the market simultaneously. Slippage gets worse. The price jumps $1,000 more.
500 more shorts liquidate at $54,500. Then 2,000 more. The exchange's liquidation engine can't close them all at once. Orders pile up. Each liquidation accelerates the next one.
Within 20 minutes, $2 billion in shorts liquidate. Bitcoin touches $58,000. Some traders who were safely in profit lost their entire position. Longs cheer briefly, then fear sets in.
Use stops, not max leverage. If using 10x, place a stop at 8% loss. Avoid leverage during news events. Diversify across exchanges so one liquidation wave doesn't destroy your account.
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