3 Reasons Bitcoin’s Fall to $21,000 and Marketwide Selloff Could Be Worse Than You Think

0

On Friday, August 19, the total crypto market capitalization fell by 9.1%, but more importantly, the $1 trillion psychological support was tapped. The last firm in the market below that just three weeks ago, meaning investors were pretty confident that the total market cap low of $780 billion on June 18 was just a distant memory. .

Regulatory uncertainty increased on August 17 after the U.S. House Committee on Energy and Commerce announced it was “deeply concerned” that evidence mining work could increase the demand for fossil fuels. As a result, US lawmakers have asked crypto mining companies to provide information on power consumption and average costs.

Typically, selloffs have a bigger impact on cryptocurrencies outside of the top 5 assets by market cap, but today’s correction featured losses ranging from 7% to 14% across the board. Bitcoin (BTC) posted a 9.7% loss as it tested $21,260 and Ether (ETH) exhibited a 10.6% drop to its intraday low of $1,675.

Some analysts might suggest that severe daily corrections like the one seen today are a norm rather than an exception given the asset’s 67% annualized volatility. For example, today’s intraday decline in total market capitalization has exceeded 9% in 19 days over the past 365 days, but some aggravators are highlighting this current correction.

The BTC Futures bounty has disappeared

Fixed-month futures typically trade at a slight premium to regular spot markets, as sellers demand more money to delay settlement longer. Technically known as “contango”, this situation is not exclusive to crypto assets.

In healthy markets, futures should trade at an annualized premium of 4-8%, which is enough to offset risk plus the cost of capital.

Annualized 3-month Bitcoin futures premium. Source: Laevitas

According to the OKX futures premium and Deribit Bitcoin, the 9.7% negative swing on BTC caused investors to shed any optimism by using derivatives. When the indicator swings into the negative zone, the ‘backward’ trade, it usually means that there is much higher demand from leveraged shorts betting on further downside.

Liquidations from leveraged buyers topped $470 million

Futures contracts are a relatively inexpensive and easy instrument that allows the use of leverage. The danger of using them lies in liquidation, which means that the investor’s margin deposit becomes insufficient to cover their positions. In these cases, the exchange’s automatic deleveraging mechanism kicks in and sells the crypto used as collateral to reduce exposure.

24-Hour Aggregate Crypto Liquidations, USD. Source: Coinglass

A trader can increase their gains by 10x using leverage, but if the asset drops 9% from its entry point, the position is terminated. The derivatives exchange will proceed to sell the collateral, creating a negative loop known as a cascading liquidation. As pictured above, the August 19 sale featured the highest number of buyers forced to sell since June 12.

Margin Traders Were Overly Bullish and Destroyed

Margin trading allows investors to borrow cryptocurrency to leverage their trading position and potentially increase their returns. As an example, a trader could buy Bitcoin by borrowing Tether (USDT), thereby increasing their exposure to the crypto. In contrast, borrowing Bitcoin can only be used to short it.

Unlike futures contracts, the balance between long and short margins is not necessarily equal. When the margin lending ratio is high, it indicates that the market is bullish – on the contrary, a low ratio signals that the market is bearish.

OKX USDT/BTC margin lending ratio. Source: OKX

Crypto traders are known to be optimistic, which is understandable given the potential for adoption and rapidly growing use cases like decentralized finance (DeFi) and the perception that certain cryptocurrencies offer protection against inflation in USD. A 17x higher margin lending rate in favor of stablecoins is not normal and indicates overconfidence on the part of leveraged buyers.

These three derivative metrics show that traders certainly didn’t expect the broader crypto market to correct as sharply as it did today, or for the total market cap to retest the 1 support. trillion dollars. This further loss of confidence could cause the bulls to further reduce their leverage positions and possibly trigger new lows in the coming weeks.

The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research before making a decision.

Share.

Comments are closed.