Liquidation cascade risk describes the potential for a rapid sequence of forced closures of leveraged trading positions in a digital asset market. This risk arises when a significant price movement triggers initial liquidations, which in turn place further downward or upward pressure on the price, leading to more liquidations. The cascading effect can accelerate market downturns or upturns, causing extreme price volatility and substantial losses for traders. It is a key concern in highly leveraged cryptocurrency derivatives markets.
Context
The risk of liquidation cascades is a constant topic of discussion among cryptocurrency market participants and regulators alike. Analysts closely monitor funding rates and open interest to gauge the likelihood of such events, which can dramatically alter market dynamics. News often highlights instances where liquidation cascades have contributed to significant market corrections or rapid price rallies.
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