Define the Term “Liquidation Cascade.”
A liquidation cascade is a chain reaction of forced liquidations in a leveraged market. When an initial price drop triggers the liquidation of several large positions, the resulting market sell-off from these liquidations further drives the price down, triggering more liquidations, and so on, rapidly accelerating the market decline.
Glossar
Chain Reaction
Trigger ⎊ A chain reaction within cryptocurrency, options, and derivatives markets denotes an initial event ⎊ a significant price movement, regulatory announcement, or substantial trade ⎊ that propagates through interconnected positions, amplifying its impact.
Liquidation Cascade
Trigger ⎊ A liquidation cascade, within cryptocurrency and derivatives markets, initiates when an asset’s price declines sufficiently to trigger margin calls for leveraged positions.
High Leverage
Amplification ⎊ High leverage, within cryptocurrency and derivatives markets, fundamentally alters risk-reward profiles by enabling a smaller capital outlay to control a larger notional exposure.
Market Sell-Off
Trigger ⎊ A market sell-off within cryptocurrency, options, and derivatives contexts represents a rapid and substantial decline in asset prices, often initiated by unexpected negative news or the realization of systemic risk.