Bitcoin is no stranger to wild swings of volatility. Even in its earlier days, it was known to rise and fall by 40 percent and upwards on a regular occasions. But now, as the market has gotten bigger, more mature, and set with a much higher price, it is still facing volatility, but with different catalysts.
Recently. Bitcoin faced a 1 billion dollar wipe out of futures contracts a day after the last price big shakeout. The continuous loop of liquidations is causing extreme volatility and large price swings in the cryptocurrency market.
The battle of the market now seems to be between the retail investors who have in the last 18 to 24 months, flooded Bitcoin with futures products across different platforms (from crypto exchanges to institutional offerings at Baakt and CME)
Why the liquidations?
In the Bitcoin futures market, traders borrow additional capital to bet against or for Bitcoin. This is known as leverage, and when traders use high leverage, the liquidation threshold gets tighter.
As an example, if a trader borrows 10 times the initial capital, a 10% price move to the opposite direction would cause the position to be liquidated. Once it is liquidated, the position becomes worthless and all of the initial capital is lost.
When Bitcoin saw the big 20% drop from $41,000 to $30,500 on Jan. 12, nearly $2 billion worth of futures contracts were liquidated.
The last 24 hours saw another £1 billion in positions liquidated but there were no major price swings to speak of at the same time as Bitcoin moved between $32,000 and $35,000. But, it seems, through available data that many traders have been overleveraging their positions to short BTC after it recovered from $30,500. Hence, as Bitcoin rallied to $35,500, many short contracts were liquidated.
A good time to shake out
It is often, in times like this when new investors are treated to the first signs of volatility, that the market ends up in a better and more sustainable place as new hands are shaken out. If the Bitcoin market remains extremely overleveraged while rallying above $40,000, it risks a much larger correction than 25%.
A trader known as “Byzantine General” noted, the $30,000 area has become a major support level.