What Is a “Liquidation Cascade” and How Does High Margin Prevent It?
A liquidation cascade is a chain reaction where one large liquidation forces the exchange to sell the collateral, driving the price down. This lower price triggers more margin calls and liquidations, further depressing the price in a rapid spiral.
High initial margin requirements create a larger price buffer, reducing the frequency of the initial liquidation trigger.
Glossar
Margin Calls
Trigger ⎊ Margin calls represent a demand from a brokerage or exchange for an investor to deposit additional funds or collateral to bring the account back to the required maintenance margin level, particularly relevant in leveraged cryptocurrency trading and derivatives markets.
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.
Margin Requirements
Definition ⎊ Margin requirements refer to the minimum amount of capital an investor must deposit and maintain with a broker or exchange to open and sustain a leveraged position in derivatives trading.