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Impact of Market Volatility on Borrowing Positions

Market volatility—large price swings—can rapidly change your loan-to-value (LTV) ratio and push you toward liquidation.

How Volatility Affects Collateral Value​

  • Collateral Value Drop: If your collateral asset’s price falls, your collateral value decreases, raising your LTV.
  • Debt Stability: If you borrowed a stablecoin, your debt amount remains constant in USD, while collateral value fluctuates.

LTV Changes with Price Swings​

  • Example:
    • Collateral: 2 ETH at $2,000/ETH → $4,000
    • Borrowed: $1,500 USDC → LTV = 37.5%
    • ETH price drops 30% to $1,400 → Collateral = $2,800
    • New LTV = $1,500 / $2,800 ≈ 53.6%

Sudden vs. Gradual Moves​

  • Sudden Crashes: Can trigger liquidations before you can react.
  • Gradual Declines: Give you time to self-liquidate or add collateral.

Correlation and Diversification​

  • Correlated Collateral: Supplying multiple assets that move together offers limited risk reduction.
  • Diversification Caution: Assets often decline together in broad market downturns.

Managing Volatility Risk​

  1. Leave a Cushion: Borrow at a lower LTV (e.g., 40–50%).
  2. Use Alerts: Price alerts for your collateral’s critical price levels.
  3. Have Liquidity on Hand: Keep stablecoins ready to repay debt.
  4. Consider Hedges: Use options or other derivatives to offset sharp declines.

Next Steps​

Continue to Module 2.3: Early Warning Tools to set up alerts and monitoring for your Compound v3 positions.