From $ 52,700 at the start of Tuesday the 7th, bitcoin fell to $ 42,900 that day.
After a quick rebound, bitcoin has fluctuated for two days around $ 46,000.
Amid the expectation created by the entry of bitcoin as legal tender in El Salvador on Tuesday, September 7, there was the largest drop in the price of bitcoin this year, after last May’s decline. A series of downward price movements in the early morning were followed by steeper falls, of up to 16.9% compared to the initial value of that day.
An analysis by CoinMetrics, published on Tuesday 8, affirms that, although the decision made by El Salvador could have some influence on the initial declines in the price of BTC, the real reason was a rapid succession of liquidations.
“As is often the case, the sudden drop was most likely due to a series of heavily leveraged futures position liquidations. More than USD 2.3 billion were liquidated last Tuesday, the largest amount since May 19, “says the report.
The price of BTC was on the rise, going from $ 39,300 on August 1 to more than $ 52,000 on September 6, the analysis notes. “But on September 7, markets fell precipitously and BTC fell to $ 43,200, a drop of almost $ 10,000.”
Leverage allows you to increase the potential returns of a futures contract, the analysis states. ‘The effective use of leverage enables a trader put in a position a capital greater than it owns. But using leverage also amplifies risk, ”the study explains.
As a position becomes more leveraged, particularly for long positions, small declines in price can lead to liquidation. While the traders They have collateral funds that cover a certain percentage of decline, in cases of high leverage the losses can exceed that margin, which causes the liquidation.
The study explains that, in turn, the liquidations put pressure on prices. When long positions are liquidated, exchanges may be forced to sell, which is downward pressure on price spot. This implies that the sell-offs can lead to more sell-offs, or what is called cascading sell-offs, sometimes causing sudden price movements. spot, remarks the study.
Although historically high levels of leverage have been allowed in the markets for futures contracts for bitcoin and other cryptocurrencies, recently FTX and Binance reduced these capital contributions from 100x to 20x, as reported in this publication.
But apparently these cuts didn’t have much of an impact on the number of leveraged futures contracts that were opened, according to the analysis. Futures open interest had risen to May levels before the September 7 crash occurred., says Coin Metrics.
The increase in open interest, in addition to indicating that more contracts are being opened and that additional money is entering the market, also gives a measure of leverage, says the document. “If there is a relatively high amount of open interest, it is very likely that there is a lot of leverage in the futures market, as contracts are often opened using leverage. As large sell-offs occur, open interest can begin to decline rapidly as the market declines. ‘
The graph below shows the open interest of bitcoin. This had grown, prior to the day of Tuesday 7 to USD 19,800 million. However, this local high was well below the April 12 peak of $ 23.5 billion and the May high of $ 21.1 billion, Coin Metrics claims.
Although it is noted in the graph that the fall of the open interest of BTC reached a value higher than USD 15,000 million, the report does not give an exact figure. A similar chart from The Block gives the values before and after the crash: $ 19.41 billion and $ 15.4 billion.
Bitcoin market analyst Will Clemente, for his part, confirms that the selloffs were the first cause of the market crash, and offers additional data on the sharp decline, in his most recent market bulletin. USD 1.23 billion long positions were liquidated, leading to a fall in open interest of USD 4.4 billion, assures Clemente.
Among other points, the analyst highlights that the predominant sales were of young coins and that the holders long-term (LTH) did not sell, but increased the BTC held. The whales acquired 44,393 BTC in these last week, while on Tuesday the 7th there was a boost in these purchases, according to the analyst.
For the analyst, this week’s market crash does not invalidate the market structure or bullish outlook for bitcoin.
So has this event changed any of the broader trends we’ve been following? The answer is no. In fact, these accumulation trends have only strengthened. Exchange inventories are down another 25,733 BTC (~ $ 1.18 billion) this week, reflected by our supply shock metric. We also saw a rise in currencies moving into strong hands reflected by our illiquid supply shock index this week, including positive momentum on Tuesday.
In the graph below, you can see the momentum of the different supply shock curves over the last seven days.
For his part, analyst Willy Woo agrees with Clemente regarding BTC purchases by whales this week. “Contrary to common opinion, the recent decline in the price of bitcoin was not due to sales of BTC by whales. These have been in a clear buying region, “says Woo in a tweet of this Saturday.
The price of BTC continues to fluctuate downward in recent days. This Saturday 11 shows a slight recovery after reaching a low of USD 44,400 on Friday night, and is trading at the time of writing this note at USD 45,745, according to the CriptoNoticias price index.
An overleveraged market with a lot of open interest in futures can represent a systemic risk for the price, since what could be a minor drop in the case of moderate leverage, turns into a large correction due to the cascading liquidations of futures.