Has ADL Ever Caused a Significant Market Event?
While ADL is designed to contain risk, its activation during periods of extreme volatility can exacerbate market fear. There have been instances where large, cascading liquidations led to a rapidly depleting insurance fund, triggering ADL on a large scale.
The resulting forced closure of many profitable positions can contribute to further price instability and a temporary loss of confidence, though it is the result of the event, not typically the cause.
Glossar
Extreme Volatility
Momentum ⎊ Within cryptocurrency derivatives and options trading, extreme volatility manifests as a rapid and sustained acceleration of price movements, often exceeding historical ranges and predictive models.
Cascading Liquidations
Trigger ⎊ Cascading liquidations initiate when an asset’s price declines sufficiently to breach the liquidation price of leveraged positions, particularly prevalent in cryptocurrency lending and derivatives markets.
Price Instability
Fluctuation ⎊ The core characteristic of price instability within cryptocurrency, options, and derivatives markets stems from heightened volatility, often exceeding levels observed in traditional asset classes.