Why is Bitcoin experiencing extreme price movements?
Almost $ 1 billion worth of Bitcoin futures contracts have been settled once again. Almost $ 1 billion worth of Bitcoin (BTC) futures contracts were settled on the 13th, a day after the big shakeup. The ongoing cycle of liquidations is causing extreme volatility and large price swings in the cryptocurrency market.
What are futures liquidations and why are so many Bitcoin positions being liquidated?
In the Bitcoin futures market, traders borrow additional capital to bet against or on Bitcoin. The technical term for this is leverage, and when traders use high leverage, the settlement threshold becomes tighter.
For example, if a trader borrows 10 times the initial capital, a 10% price movement in the opposite direction would cause the position to be liquidated. Once liquidated, the position loses value and all initial capital is lost.
When Bitcoin experienced the huge 20% drop from $ 41,000 to $ 30,500 on January 12, almost $ 2 billion in futures contracts were settled. However, within 24 hours of that, another $ 1 billion worth of contracts was settled. However, there were no major price swings apart from the range between $ 32,000 and $ 35,500.
Data indicates that many traders have been over-leveraging their positions to short BTC after it rallied from $ 30,500. Hence, when Bitcoin rallied to $ 35,500, many short contracts were liquidated. The cascading settlements of short contracts are probably the main reason behind BTC’s rapid 20% relief surge from $ 30,500 to $ 35,500.
The market is less leveraged compared to the last two weeks. The futures financing rate ranges from 0.01% to 0.05%, which means that buyers still represent the majority of the market, but do not dominate the market. By comparison, when Bitcoin was above $ 40,000, the futures funding rate was consistently around 0.1% to 0.15%. This meant that the market was overwhelmed by over-leveraged buyers and traders.
A ‘healthy’ shake
Although extreme volatility is unfavorable, restructuring an overlevered market is healthy and essential for the continuation of the rally. If the Bitcoin market remains extremely overlevered as it recovers above $ 40,000, you risk a correction much larger than 25%.
In previous bull markets, Bitcoin frequently experienced 30% to 40% pullbacks and as such the recent drop from $ 42,000 to almost $ 30,000 is nothing out of the ordinary for a BTC bull market.
Also, as the pseudonym trader known as “Byzantine General” pointed out, the $ 30,000 support area has become an important support level.
The cooling of the Bitcoin futures market as it solidifies $ 30,000 as a support area is very optimistic for the medium-term outlook for BTC.
Whale clusters also identify the $ 30,000 level as a cluster support, which means that this psychological level will certainly be defended by the bulls if the price turns down.
Disclaimer: This press release is for informational purposes information does not constitute investment advice or an offer to invest. The views expressed in this article are those of the author and do not necessarily represent the views of infocoin, and should not be attributed to, Infocoin.