It’s a long vicious circle familiar to those in traditional finance: trades made with borrowed money come apart when the value of collateral put up against a loan drops, forcing liquidations that one push prices down further. The pattern, driven by margin calls, has come to the crypto currency market in a big way since the price began to fall widely – with a few twists just additional crypto.
In traditional markets, trading with borrowed money is called debt on margin. Lenders, usually brokers, require these securities, usually in the form of other shares, to be sent to offset the risk of the trade becoming unfavorable. The bond term is defined as a percentage of the loan. That means if the value of the collateral goes down, the broker will ask the investor to post more collateral or close the position and repay the loan.
