Leverage Dependency

Leverage dependency describes a market state where the stability and liquidity of the system are heavily reliant on the use of borrowed capital. When a large portion of market activity is fueled by leverage, the system becomes highly sensitive to price changes.

A small drop in asset prices can trigger a wave of forced liquidations, as leveraged positions are closed to meet margin requirements. These liquidations then put further downward pressure on prices, creating a feedback loop that can lead to rapid market crashes.

Leverage dependency makes the market more fragile and prone to extreme volatility. It is a defining characteristic of many derivative-heavy markets, where the interplay between margin calls and market depth dictates the overall health and direction of the asset prices.