It's a vicious circle long familiar to those in traditional finance: trades made with borrowed money coming apart when the value of their collateral put up against the loans drops, forcing liquidations that in turn push prices down further.
That pattern, driven by so-called margin calls, has come to cryptocurrency markets in a big way since prices began to slump broadly -- with some additional crypto-only twists.
1. What's a margin call?
In traditional markets, trading with borrowed money is called borrowing on the margin. The lenders, usually brokers, require that collateral, usually in the form of other stocks, be posted to offset the risk of the trade going sour. The collateral requirement is defined as a percentage of the loan. That means that if the value of the collateral drops, the broker will call for the investor to either post more collateral or close the position and repay the loan.
2. How can margin calls disrupt markets?
The system usually works well enough when markets...
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