Crypto Trading: What are Cascading Liquidations?

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1. What Are Cascade Liquidations?

Cascading liquidations occur frequently in over-leveraged markets. Just like investment in other businesses, liquidations in cryptocurrencies can either lead to huge loss or huge profit.

To give investors time to add collateral to their position and prevent liquidation, most investment platforms use margin calls that are higher than the investor's liquidation price. Depending on the value of your collateral and the amount of tokens you purchase, you are offered the liquidation price in advance when you take a loan.

If the market price drops and things don't go as expected, most lending protocols start selling your collateral in multiple installments to make up the difference.

Unfortunately, when these liquidations occur, the selling pressure increases. As new lows are reached, this also has a compounding impact that causes more positions to be liquidated. Everyone in the market was panicking because they had to pay off their loan and prevent liquidation. Cascading collateralized loans begin to liquidate as a result of pressure on other currencies.

2. What Triggers A Cascade Liquidation?

In bear markets, cascading liquidations are common due to a lack of investor confidence. As a result, they transfer their funds to low-risk investment opportunities when they earn profits. This usually increases selling pressure in all markets. Some traders choose to use their portfolios to amplify their profits. Unfortunately, some of them are liquidated by the first selling impulse, and this liquidation cascade event is caused by these liquidations.

3. Ways to Counter Cascade Liquidations

Leverage should be avoided at all costs unless you are fully informed about what you are doing and all the potential dangers associated with it in order to successfully prevent cascading liquidations. Thus, it is preferable to use dollar cost averaging (DCA) when opening new positions.

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