What Are ‘Cascading Liquidations’ and How Do They Relate to Flash Crashes?
Cascading liquidations occur when the forced closure of one large leveraged position generates significant market selling pressure, causing the price to drop further. This drop triggers the liquidation of other leveraged positions, which in turn adds more selling pressure, creating a self-reinforcing downward spiral.
Flash crashes are often exacerbated or even caused by this chain reaction, as the market rapidly loses liquidity and depth.
Glossar
Flash Crashes
Volatility ⎊ Within cryptocurrency derivatives and options markets, flash crashes represent abrupt, extreme price declines occurring over exceptionally short durations, often measured in seconds or minutes.
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.
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.