What Is the Risk of Using Volatile Cryptocurrency as Collateral for Derivatives? ⎊ Path

What Is the Risk of Using Volatile Cryptocurrency as Collateral for Derivatives?

The primary risk is that a sudden, sharp drop in the collateral's price can lead to rapid liquidation of the derivative position, even if the underlying asset of the derivative has not moved significantly. This volatility requires high over-collateralization to maintain a safety buffer, which reduces capital efficiency.

A cascade of liquidations can also occur during a market crash.

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Glossar

Volatile Cryptocurrency

Instability ⎊ Volatile cryptocurrency characteristics stem from supply and demand imbalances amplified by market microstructure factors, resulting in significant price fluctuations beyond traditional asset classes.