Margin Liquidation Cascade

A margin liquidation cascade is a self-reinforcing cycle where the forced closing of leveraged positions triggers further price declines, leading to more liquidations. This phenomenon occurs when a sharp price drop forces traders who are over-leveraged to sell their positions to cover margin requirements.

These forced sales push the price down further, triggering additional stop-losses and liquidations for other participants. In the crypto derivatives market, this is a major source of systemic risk and flash crashes.

The speed of the cascade is exacerbated by low liquidity and the interconnected nature of automated liquidation engines. It highlights the dangers of excessive leverage in volatile markets.