Margin Call Spiral

A margin call spiral occurs when falling asset prices trigger a cascade of margin calls across a leveraged market. As prices drop, traders who have borrowed capital to hold positions are required to deposit more collateral.

If they cannot meet these requirements, their positions are liquidated by the exchange or protocol. These forced liquidations sell the assets into an already declining market, further driving down the price.

This lower price then triggers margin calls for other traders, creating a self-reinforcing loop of selling and price depreciation. This phenomenon is particularly acute in cryptocurrency markets due to high leverage, rapid volatility, and automated liquidation engines.

It represents a systemic risk where liquidity vanishes as participants are forced out simultaneously. The spiral continues until the market reaches a price floor where liquidations cease or sufficient new buying enters the market.