Analysts Speculate Leveraged Liquidations Caused Market Crash
The price of Bitcoin fell as much as 30% Wednesday, continuing a significant sell-off in the cryptocurrency markets that began a few days ago. The digital currency declined as low as $30,001.51 as the selling intensified before paring some of those losses. The cryptocurrency hasn’t traded at such value since late January.
Elon Musk drama and China Banking Association warning member banks of risks associated with digital currencies have contributed to the plunge. However, analysts say that over-leveraged positions being liquidated have exacerbated the sell-off.
Ether was 44% down at less than $2,000 at one point. Other digital currencies suffered sharp declines too.
There were $9.4 billion of liquidations in the 24 hours through early morning on Thursday in Singapore, and over 887,000 traders liquidated.
Fundstrat Global Advisors LLC’s Tom Lee said that exchanges offer so much leverage that new traders will always be at risk of forced sales when virtual currencies drop.
“What leads to major pullbacks is a case of system overload, liquidations, and such factors,” said Vijay Ayyar, head of Asia Pacific at Luno Pte. He added that crypto is a ‘wilder West’ compared to other asset classes where you can trade on some exchanges for up to 50-100X leverage,” and “what they have seen is significant funding reset through exchanges because of overleveraged traders.
Lemons and Lemonade
In a lengthy tweet titled “lemons and lemonade,” a quantitative crypto trader at Alameda Research, Sam Trabucco, first acknowledges that several institutions were getting into Bitcoin. They caused it to rally before switching their attention to Ethereum, which also surged to an all-time high outperforming its big brother.
With Musk shilling Dogecoin and several other altcoins like Cardano, Binance Coin, and even Litecoin reaching new all-time highs, markets resembled the FOMO-driven three-month surge that happened in 2017/18.
There was speculation that the rallies, especially the ETH rallies, were low-leverage and spot-driven and thus “more organic” somehow. The analysis means that there’d be relatively little liquidation in the event of a downturn, unlike Bitcoin, which is highly leveraged.
Trabucco proceeded to say that this rally seemed identical to all the others, with open interest shooting up the entire time. Aggregated OI, especially for ETH, was surging, which signified a lot of leverage on derivatives exchanges.
He added that whatever led to the initial crypto market crash was probably the Elon drama with some China regulatory news. Moreover, he said, it could lean on its a natural correction. Liquidations most likely did a lot of work to make the downturn more intense.”