Leverage cuts both ways. When a leveraged position moves far enough against the trader that their margin can no longer cover it, the exchange force-closes it — a liquidation. Because liquidations are market orders fired automatically, they add fuel to whatever move caused them.
The cascade
Liquidations cluster where leverage clusters. A drop that liquidates one batch of longs sends market sells into the book, pushing price lower — which triggers the next batch, and the next. That self-feeding chain is a liquidation cascade, and it is why crypto can drop violently in minutes on no news: it is forced selling triggering more forced selling.
Liquidations as fuel
A short squeeze is the bullish mirror: rising price liquidates shorts, whose forced buy-backs push price higher, liquidating more shorts. This is why heavily one-sided positioning (seen via OI + funding) is combustible — the crowded side is a tank of fuel waiting for a spark.
Reading the spike
A huge liquidation spike after an extended move often marks exhaustion, not continuation: the last over-leveraged traders have just been flushed, leaving fewer forced sellers behind. Capitulation wicks — a violent spike that immediately reverses — frequently coincide with a liquidation cluster being cleared.