Exchange Counterparty Risk vs Liquidation Cascade

The risk that an exchange fails or becomes insolvent, rendering derivatives positions — which are contractual claims on the exchange, not direct asset ownership — unrecoverable; the FTX collapse in November 2022 resulted in approximately $8 billion in user funds lost; mitigated by limiting single-exchange exposure to 30% of total capital.

A self-reinforcing sequence of forced position closures in which one tier of liquidations drives price movement that triggers the next tier; the mechanism behind crypto's most extreme price crashes; most severe when open interest is high and leverage concentration is elevated.