Margin Call Liquidation Spiral

A liquidation spiral occurs when falling asset prices trigger automated margin calls, forcing traders to sell assets to maintain collateral requirements. These forced sales push prices lower, which triggers further margin calls for other traders, creating a self-reinforcing downward loop.

In the cryptocurrency ecosystem, this is often amplified by the lack of centralized circuit breakers and the high interconnectedness of lending protocols. As liquidations propagate, they can lead to systemic insolvency if the protocol's collateral cannot be sold fast enough to cover the debt.

This mechanism is a primary source of extreme, short-term volatility in digital asset markets.