Key Insights:
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The recent decline in Bitcoin prices highlights ongoing volatility in the era of the spot BTC ETF, with leverage and liquidity challenges exacerbating losses.
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Liquidations reached $5 billion as portfolio margin systems encountered failures, revealing the dangers associated with illiquid collateral assets.
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Bitcoin derivatives indicate that market makers are exercising caution due to low liquidity, insolvency speculation, and an impending US national holiday, resulting in a partial market shutdown.
On Friday, Bitcoin (BTC) plummeted by $16,700 within just eight hours, representing a 13.7% correction. This sharp descent to $105,000 erased 13% of total futures open interest in BTC. Despite the significant losses and the ensuing wave of liquidations, such occurrences are not unfamiliar in Bitcoin’s historical context.
Excluding the notable “COVID crash” of March 12, 2020, which saw a staggering 41.1% intraday drop, there are still 48 other instances where Bitcoin experienced sharper corrections. A notable recent incident occurred on November 9, 2022, when Bitcoin faced a 16.1% drop, coinciding with the collapse of FTX, which revealed significant ties to Alameda Research’s assets.
Persisting Volatility Despite Market Maturity Post-ETF
While one might argue that intraday crashes exceeding 10% have become less common since the inception of the spot Bitcoin exchange-traded fund (ETF) in January 2024, it may be too early to claim that volatility has genuinely decreased. Additionally, trading dynamics have shifted as volumes on decentralized exchanges (DEXs) have surged.
Post-ETF events include notable declines, such as a 15.4% drop on August 5, 2024, a 13.3% correction on March 5, 2024, and a 10.5% drop just two days after the ETF’s launch. The $5 billion in Bitcoin futures liquidations from Friday indicates that it may require months or even years for the market to normalize.
Hyperliquid, a decentralized exchange, noted that $2.6 billion in bullish positions were forcibly closed. Moreover, traders across various platforms, including Binance, experienced issues with portfolio margin calculations, and DEX users reported auto-deleveraging incidents, which happen when margin requirements are unmet.
Essentially, even traders holding considerable gains faced unexpected position terminations, causing significant challenges for those employing portfolio margin rather than isolated risk strategies. This situation isn’t necessarily due to exchange misconduct; it’s an outcome of leveraging in relatively illiquid markets, resulting in some altcoins losing over 40% in value.
During the crash, Bitcoin/USDT perpetual futures traded approximately 5% below BTC/USD spot prices and have not yet recovered. Normally, such variances would allow market makers to exploit opportunities, but certain factors seem to inhibit a return to stable conditions. The crash could be attributed to thin weekend liquidity, particularly with US bond markets closed due to a national holiday, alongside potential insolvency rumors triggering further caution from market makers.
Consequently, it may take several days for the Bitcoin derivatives markets to fully assess the repercussions of the crash and for traders to determine whether the $105,000 threshold will offer support or if additional corrections are on the horizon.
This article is for informational purposes only and should not be construed as legal or investment advice. The opinions expressed are solely those of the author and do not necessarily represent the views of Cointelegraph.
