Liquidation Cascade
A chain reaction where one leveraged position's liquidation pushes price further against other similar positions, triggering further liquidations in sequence.
A liquidation cascade is a chain reaction in which one leveraged position's forced liquidation (see Kaavon's "Liquidation" glossary definition) — which generally involves selling the position's collateral into the market — pushes price further in an unfavorable direction for other similarly-leveraged positions, triggering their liquidation in turn, and so on in sequence.
Liquidation cascades are a well-documented driver of especially sharp, fast price moves during periods of high leverage and thin liquidity, since each successive forced sale adds further downward (or upward, for short positions) pressure beyond what the original price move alone would have caused.
Examples
- A liquidation cascade can turn an ordinary price decline into a much sharper, faster crash, as each liquidation's forced selling triggers the next.
- Periods of unusually high leverage across the market make a liquidation cascade more likely, since more positions sit closer to their liquidation threshold simultaneously.
Learn more
Liquidation
Read the Liquidation glossary definition
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Read the Long Squeeze glossary definition
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