A margin call avalanche denotes a rapid and widespread sequence of margin calls and subsequent liquidations across numerous trading accounts, particularly prevalent in highly volatile crypto markets. This event signifies a severe market downturn where declining asset values erode collateral, forcing leveraged positions to be closed to prevent further losses. It represents a systemic stress event, often amplifying market corrections.
Mechanism
This phenomenon begins when a sharp price drop pushes many leveraged positions below their maintenance margin thresholds. This triggers automated margin calls, and if traders cannot provide additional collateral, their positions are automatically liquidated. These forced sales inject more supply into the market, further depressing prices and initiating a new wave of margin calls, creating a self-reinforcing downward spiral.
Methodology
Mitigating the risk of a margin call avalanche involves employing rigorous risk management protocols, including conservative leverage limits, dynamic margin requirements, and stress testing portfolio resilience against extreme price shocks. Institutional participants frequently use advanced analytics to monitor aggregated market leverage and assess concentration risks. Proactive deleveraging and robust collateral management are critical for preventing participation in or suffering from such systemic market events.
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