How Do Cross-Exchange Liquidations Amplify Systemic Risk?
Systemic risk is amplified when a single event on one exchange triggers cascading liquidations across multiple exchanges. A price drop on Exchange A can trigger liquidations there, whose sell orders depress the global price, triggering liquidations on Exchange B, and so on.
This interconnectedness rapidly spreads the death spiral across the entire crypto ecosystem.
Glossar
Liquidations
Trigger ⎊ Liquidations represent the forced closure of leveraged positions due to insufficient margin to cover adverse price movements, a critical event in cryptocurrency, options, and derivatives markets.
Triggering Liquidations
Cascade ⎊ Triggering liquidations represent a systemic risk propagation mechanism within cryptocurrency derivatives markets, where an initial liquidation event instigates a chain reaction of further liquidations due to interconnected positions and margin requirements.
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.