Leveraged Long Trades Equal Crypto Bloodbath on Saturday
Leveraged long trades in Bitcoin are leading the entire market lower today. Over $100 million was liquidated in a 10 minute period and Over $1.78 billion was liquidated in a span of 12 hours.
We don’t talk about Bitcoin much here at Altcoin Buzz. But it’s still the leader in crypto by a long way over Ethereum and every other project. And what happens to Bitcoin often affects the broader crypto market as a whole.
And that’s true this time. This most recent 24 hour period is a bloodbath for crypto. Here are some of the returns:
- Bitcoin down 17%
- Ethereum down 14%
- Polkadot down 21%
- Dogecoin down 20%
- and Avalanche down 15%
Currently, EOS is the hardest hit down 26%.
So what the heck is going on?
Leverage Accelerates Price Drop
Leveraged longs in Bitcoin are the problem.
What are leveraged longs?
A leveraged long is a position where someone buys (goes long) and uses leverage to do so. So they are borrowing to increase the size of their position and potential profits.
When people believe in the crypto philosophy of ‘number go up’, they can fall into a trap. They can think that declines don’t happen. If the coin is worth more in a year than it is today, then why not use leverage to make more money?
So many small traders do exactly that. Binance allows up to 125x leverage. Deribit allows 100x leverage. FTX allows 20x leverage.
And leverage accelerates a price drop making it fall farther and faster.
Using Deribit as an example, you can trade a $100,000 position of ~2 BTC for only $1000 with 100x leverage. What happens if the price of Bitcoin drops by $500 meaning your position is down $1000? You lose your margin deposit and you have to close your position. Deribit will do it for you by forcing it since you cannot lose more than you have on deposit with them.
Leverage Creates a Vicious Circle
So what happens next when many small traders are forced to liquidate their leveraged long positions?
Lots of sell orders from the exchanges. And that’s exactly what happened. Selling and more selling drives the price down when there are more sellers than buyers
Coinglass confirms this for us in their liquidation data.
You can see here that All crypto liquidations (upper left) show $2.53 billion USD worth in the last 24 hours.
And of that, $1.05 billion or 41.5% of all liquidations are Bitcoin. Bitcoin is driving the entire market lower.
The reason Bitcoin is leading the whole market lower is that they are leading this vicious circle. And the reason they are leading this circle of continuous selling is that Bitcoin has the most derivatives available. Bitcoin futures and options dwarf all other crypto with billions traded daily.
And in the last 24 hours, open interest (the number of futures contracts available) for Bitcoin dropped by $4.4 billion.
$BTC aggregate futures open interest -$4.423 billion over the last 24 hours. pic.twitter.com/GCJUl1vAKs
— Dylan LeClair 🟠 (@DylanLeClair_) December 4, 2021
Every other crypto market is just too small or in the case of Ethereum the institutional interest is not strong enough (yet) to have many take part in ETH futures.
What Can You Do?
First, take a deep breath. You can’t have eye-popping gains without big declines once in a while. If you take a longer view by taking a step back and comparing prices to a year ago, then you will see you are fine. That’s as long as the fundamentals of your projects haven’t changed. Then you have a decision to make if you believe something is different about Bitcoin, Ethereum, Solana, or other projects you’ve invested in.
The second thing you can do if you have some ‘dry powder’ is go searching for some bargains. Almost everything is on sale now. If you liked DOT at $45, then why wouldn’t you like it more at $28? You’re getting an almost 40% discount from a month ago.
You can’t control prices but you can control how you react to them. Those who have been waiting for a dip to buy some more now’s your chance.
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