Cascading Liquidations in Crypto Trading | TGDRatings
Cascading Liquidations are events where liquidations overlap each other, resulting in a sudden change in price.
What are Cascading Liquidations?
Cascading Liquidations generally coincide with an overheated or over-committed market. As with other investments, cascading liquidations in cryptocurrency can result in either large losses or large gains.
Most investment platforms use margin calls that are higher than the investor’s liquidation price to give them time to add collateral to their position and avoid liquidation. When taking out a cryptocurrency loan, such as against bitcoin, you are told the liquidation price in advance depending on the value of your collateral and the number of tokens you are taking out.
If the market price falls and things don’t go according to plan, most lending protocols start selling some of your collateral to cover the amount.
This increases the selling pressure as liquidation takes place. It also creates a compounding effect, forcing more and more people to liquidate as new lows are reached. At one point, everyone in the market starts to panic as they need to cover their credit and avoid liquidation. Cascading liquidations tend to have a ripple effect; other coins put pressure on the cells and credit against those coins begins to liquidate.
What causes a cascading liquidation?
Cascading liquidations are common in bear markets because of low investor confidence. They keep their positions closed, lock in profits and move money into less risky investment options. This usually creates selling pressure in all markets. At this point, some traders choose to use leverage in their portfolios to increase their profits. Some are liquidated as a result of the initial selling pressure and these liquidations create a cascading liquidation event.
Ways to counteract cascading liquidations
- To successfully counteract cascading liquidations, you must avoid using leverage at all costs until you are fully aware of what you are doing and all of the risks involved.
- When entering into a new project, it is better to use the dollar cost averaging method. You can then hold those tokens and look for ways to earn more tokens without risking your portfolio.