What Is a Liquidation Cascade and How Does It Differ from a Standard Margin Call?
A standard margin call is a request for an individual trader to add more funds to their account. A liquidation cascade is a chain reaction that follows.
When a trader fails a margin call, their broker forcibly sells their assets. This large sell order pushes the market price down, which in turn causes other leveraged traders' positions to fall below margin requirements.
This triggers a new wave of forced liquidations, creating a domino effect where each liquidation triggers the next, rapidly accelerating the death spiral.
Glossar
Derivatives Trading
Leverage ⎊ Derivatives trading, within cryptocurrency, options, and financial markets, fundamentally represents a contractual agreement where value is derived from an underlying asset, enabling amplified exposure without necessitating outright ownership.
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.
Standard Margin Call
Trigger ⎊ A standard margin call in cryptocurrency derivatives, including options, represents a demand from a broker to deposit additional funds into a margin account when the account’s equity falls below the maintenance margin requirement, a level established to cover potential losses.