Liquidation Cascade Probability

Liquidation Cascade Probability is the likelihood that a series of forced liquidations will occur in a derivative market, leading to a rapid and significant price move. These cascades happen when the price hits a threshold that triggers margin calls, which in turn force the sale of assets, further depressing the price and triggering more liquidations.

This phenomenon is a major source of systemic risk in crypto, where high leverage is common. Analysts calculate this probability by looking at the concentration of open interest at specific price levels.

A high density of liquidation orders at a certain price point increases the probability of a cascade if that level is breached. Understanding this risk is essential for managing leverage and protecting portfolios during periods of high volatility.

It is a core study in systems risk and contagion within the digital asset ecosystem.