From the desk of Louis Sykes @haumicharts
If you’ve ever been deep in the trenches slinging cryptocurrencies, chances are you’re well aware of the infamous liquidation cascade.
For some traders, the thought will send shivers down their backs.
To others, it represents one of the most profitable asymmetries in supply and demand.
What’s a Liquidation Cascade?
The Chicago Mercantile Exchange (CME) is the largest and most sophisticated derivatives exchange for several traditional financial instruments and Bitcoin futures contracts. But there are stringent rules bounding these contracts:
- Each contract is 5 BTC (currently just over $200,000).
- The market is only open Monday through Friday.
- Clients tend to have a good relationship with a broker that’s allowed to trade on the CME.
These rules are essentially a risk-mitigation strategy.
In the case of liquidations, if the account reaches negative equity before the liquidation is finished, the trader is liable for the negative amount.
Further, failure to pay this would result in a bankruptcy proceeding, which the broker has to cover if that isn’t paid.