Cryptocurrency Markets Witness Whirlwind Week
From Steep Plunges to Sudden Rebounds
The volatile nature of cryptocurrency was vividly on display this week, resulting in significant setbacks for traders. Data procured from Coinglass reveals that a staggering $256 million was liquidated in just 48 hours.
Monday’s Market Meltdown
Monday’s market activity saw a rapid decline in crypto prices, primarily due to concerns about FTX considering offloading its crypto assets. Bitcoin, the leading digital currency, slipped from its standing at around $26,000 to below the $25,000 mark – a price not seen since mid-June. Ether, another prominent digital currency, experienced its lowest price point in half a year. Across the board, major cryptocurrencies recorded declines between 5% and 10%.
Such a price drop led to $167 million in liquidations on that very day. A noteworthy point from Coinglass’s data is that a whopping 90% of these liquidations were leveraged long positions. This incident stands out as the most extensive leverage liquidation since the tumultuous trading day of August 17, where Bitcoin’s value plummeted from approximately $29,000 to beneath $25,000 within a few hours.
However, in the aftermath of Monday’s downturn, many traders took up short positions, predicting further drops. Their forecast was abruptly challenged when a short squeeze initiated on Monday night, restoring digital asset values. This surge propelled Bitcoin’s price by over 4%, placing it once again above the $26,000 threshold by early Tuesday. This upward shift caused a liquidation of another $89 million in leveraged positions, predominantly affecting short positions.
Understanding the Liquidation Landscape
Large-scale liquidation episodes often serve as indicators of temporary peaks or troughs in prices. This is because dramatic price fluctuations compel derivatives traders to reassess and adjust their market stances. Liquidations are initiated by exchanges when a leveraged position is closed, either partially or in full, due to the trader’s inability to meet the necessary additional funding requirements to maintain the position open, causing a loss of the initial margin.
David Lawant, the Chief Researcher at the institutional exchange FalconX, shared insights about the broader market impact of such liquidations. In a recent market overview, he highlighted that open interest – which refers to the sum total of active options and futures contracts in the market – typically sees a decline after massive liquidation episodes. The report emphasized that the open interest for both Bitcoin and Ether derivatives on major platforms has decreased by nearly 38% from its annual peak. Currently, it mirrors levels observed in March.
Concluding on an analytical note, Lawant remarked, “The considerable decline in open interest over the recent half-year indicates that liquidations might not have as profound an impact on spot prices moving forward.”
