What Is the Role of Margin Calls in Accelerating a Death Spiral in Derivatives Trading?
Margin calls act as a mechanical accelerant to a psychologically-driven death spiral. When asset prices fall, leveraged traders are forced to sell their holdings to meet margin requirements.
This forced selling is not based on market sentiment but on contractual obligation, adding immense, inelastic selling pressure. This drives prices down further, triggering a cascade of more margin calls for other traders.
The panic intensifies as investors realize the selling is automated and relentless, speeding up the price collapse.
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.
Role of Margin Calls
Trigger ⎊ Margin calls represent a critical mechanism in cryptocurrency, options trading, and financial derivatives markets, functioning as a demand for additional funds to maintain a trading position’s required collateralization level.
Death Spiral
Cascade ⎊ The "Death Spiral" in cryptocurrency derivatives, options trading, and related financial instruments describes a self-reinforcing negative feedback loop where declining asset prices trigger margin calls, forced liquidations, and further price depreciation, ultimately accelerating the downward trajectory.