What is a Liquidation Cascade?

June 10, 2024

Overview

A liquidation cascade is a series of forced liquidations that can trigger a downward spiral in the prices of assets or cryptocurrencies.

2 min. read

2 min. read

2 min. read

A liquidation cascade is a phenomenon that can occur in the financial markets. It refers to a series of forced liquidations that can trigger a downward spiral in the prices of assets or cryptocurrencies. Liquidation in simple terms refers to the forced selling of a trader’s position for cash or a cash equivalent when the trader cannot meet a margin requirement.

When the value of a trader's collateral falls below a certain value, their position is automatically liquidated to cover the loan. If this happens on a large scale, it can lead to a domino effect, causing the price of a certain coin to drop further and triggering even more stop losses, which is referred to as liquidation.

Large-scale crypto liquidations can quickly make a bullish market to a bearish one. The occurrence of massive liquidations can trigger panic selling among traders, thus the massive price dropdown. This negative shift in sentiment may discourage new investors and traders from entering the market, resulting in reduced liquidity and more market volatility.

Liquidation cascade is affected by certain market factors, including price volatility, excessive leverage, large stop-loss orders at certain price values, and even news that may significantly affect the price of an asset.Investors and Valuation

Disclaimer: The information provided in this research paper is for educational and informational purposes only. It does not constitute financial advice, investment guidance, or any solicitation to buy or sell financial instruments. The views expressed herein are those of the authors and do not necessarily reflect the opinions of Kollectiv.

2024