Cascading Liquidations

Cascading liquidations are a chain reaction in leveraged markets, in which the forced closing of some traders' positions moves the price far enough to force the closing of others, and so on. Each wave of selling (or, in a rising market, buying) feeds the next. The result is a sudden, steep price move, sometimes within minutes, that is much larger than the news that started it. The pattern is especially common in crypto, where high leverage and round-the-clock trading are widespread.

The term covers two settings. On centralized exchanges, traders using margin trading or perpetual futures are closed out automatically when their margin runs out. In decentralized finance, loans backed by crypto collateral are liquidated by smart contracts when collateral values fall. Both create the same feedback loop, and both are linked to wider concerns about systemic risk.

Think of a row of dominoes standing close together. Each domino is a trader who borrowed money to bet on the price, and each has a point where it will fall over. When the first one falls, it knocks the next one down, and soon the whole row collapses in a rush.

In a market, a trader "falls" when the price moves against them far enough that the exchange or lending app sells their holdings to get its loan back. That sale pushes the price a little further, which is enough to reach the next trader's limit, whose holdings are then sold too. Because many traders set similar limits at round numbers, the dominoes can be lined up very tightly.

A typical cascade in a falling market follows a sequence:

1. A trigger. Bad news, a large sale or a technical break pushes the price down.
2. First liquidations. The most highly leveraged long positions reach their liquidation price and are closed by the exchange's forced liquidation engine, which sells into the market.
3. Thin liquidity. If the order book has few buyers, these sales cause heavy slippage, moving the price further than usual.
4. Next layers. The new, lower price hits the liquidation levels of less leveraged traders, and the process repeats until it reaches a level where buyers absorb the selling.

The same mechanism works in reverse in a rising market, when short sellers are forced to buy back, producing a "short squeeze". Stop orders placed by unleveraged traders, such as a stop-loss order, can add fuel by turning into market sales at the same levels.

Lending protocols let users borrow against crypto deposits up to a limit set by each asset's collateral factor. When a price feed from a blockchain oracle shows that a loan has become undercollateralized, outside bots called liquidators repay part of the debt and receive the collateral at a discount, usually selling it straight away on a decentralized exchange. If many loans use the same collateral, those sales drive the price lower and push more loans past their limits. On 12 March 2020, known in the crypto community as Black Thursday, the price of ether fell sharply, network congestion slowed transactions and some MakerDAO collateral auctions closed with bids of zero, leaving the system short of collateral. The protocol later changed its auction design.

Large crypto cascades have tended to happen when open interest in leveraged products is high. Sell-offs in May 2021, May 2022 during the collapse of the Terra ecosystem, and November 2022 after the FTX failure each saw billions of dollars of positions liquidated within days, according to data aggregators. On 10 October 2025, a sharp market-wide fall led to what trackers reported as the largest single day of crypto liquidations on record, with roughly $19 billion of leveraged positions closed, and some exchanges used auto-deleveraging, closing profitable positions to cover losses their insurance funds could not absorb.

Exchanges try to contain cascades with tiered margin requirements, insurance funds, partial rather than full liquidations and price feeds that average several markets to resist manipulation. DeFi protocols adjust collateral factors, cap exposure to volatile assets and use auction designs that keep liquidators active during congestion. For individual traders, lower leverage and wider margins reduce the chance of being caught in a cascade, while a whale holding a very large position can sometimes become a target if others try to push the price to its liquidation level.