Understanding Cascading Liquidations
Cascading liquidations often occur during periods of an overheated or over-leveraged market.
In cryptocurrency, cascading liquidations can lead to significant losses or substantial profits, similar to other investment ventures.
Safeguarding Investments in Cryptocurrency Trading
Many investment platforms implement margin calls above an investor’s liquidation price, allowing them time to add collateral to their position and avoid liquidation.
When obtaining a loan against a cryptocurrency, such as Bitcoin, the liquidation price is determined based on the value of the collateral and the number of tokens borrowed.
If the market price experiences a drop and the situation deviates from the intended plan, most lending protocols begin selling portions of the collateral to cover the outstanding amount.
Factors Triggering Cascading Liquidations
Cascading liquidations commonly occur in bear markets when investor confidence is low.
Many investors close their positions, secure profits, and shift their funds to less risky investment options during this period.
This selling pressure extends across all markets.
Some traders choose to leverage their portfolios to amplify potential gains.
Unfortunately, these leveraged positions can be liquidated due to the initial selling pressure, leading to a cascade of liquidations.
Strategies to Mitigate Cascading Liquidations
To effectively counter cascading liquidations, it is crucial to exercise caution when considering leverage.
Unless fully aware of the associated risks and knowledgeable about the situation, it is generally advisable to avoid leveraging positions.
Implementing dollar-cost averaging can be beneficial when entering new projects.
This strategy involves systematically investing a fixed amount at regular intervals.
By holding onto these tokens and exploring opportunities to earn additional tokens without jeopardizing the portfolio, investors can minimize the risk of liquidations.
Staking can be a valuable approach in this regard.