Excessive Leverage Ratio

Definition ∞ Excessive leverage ratio describes a financial condition where an investor or entity uses a disproportionately large amount of borrowed capital relative to their own equity. This amplifies potential gains but also greatly magnifies losses. In digital asset markets, high leverage can lead to rapid liquidations during price swings. Such ratios pose substantial risk to individual participants and market stability.
Context ∞ Excessive leverage ratios are a recurring topic in analyses of cryptocurrency market volatility and sudden price drops. Reports often link large liquidation events to over-leveraged positions, which can trigger cascade effects across trading platforms. Regulators frequently examine these ratios as they consider measures to protect retail investors and mitigate systemic market risk.