Crypto Deleveraging

Market Insights May 27, 2021

The context

Cryptocurrency assets saw extreme volatility last week as Bitcoin touched a low of approximately $31,000. The latest crash in the cryptocurrency market (May 22-23 weekend) accelerated liquidations of leveraged traders.
The overall market cap of digital currencies dropped at $1.3 trillion on May 23 after reaching $2.4 trillion in early May and Bitcoin’s dominance rate was 43% as of May 26, a massive drop from 72% early January.
The market is now trying to consolidate but it will most likely remain choppy in the next few weeks, with many technical analysts expecting bitcoin to remain range-bound between $31,000 and $42,000.


Last week's dramatic fall in the bitcoin price was notably due to the ban on cryptocurrency payments by China and Elon Musk’s tweet, announcing that Tesla will no longer accept payment in cryptos due to environmental concerns.
Too much leverage in the market is another reason behind Bitcoin's precipitous fall last week. The core cause of the sell-off was related to investor positioning rather than fundamental news. Simply put, traders have been over-leveraged and positioned for a long time, which has resulted in forced liquidations. As with any significant downturn in the crypto market, derivatives and leveraged traders were hit especially hard.
Amid the market-wide risk aversion, exchanges offering crypto futures have liquidated $8 billion worth of positions on May 19, according to data source Bitcoin futures account for almost 50% of the total market-wide liquidations. Since then, the market has mostly seen liquidations of less than $4 billion per day. The previous liquidation record was the almost $10bn of forced closures observed on April 17, when bitcoin fell sharply from $60,000.

Liquidations occur when trades cannot meet the margin requirements to hold long/short positions and often exacerbate bullish/bearish movements. The forced closure of bullish trades shows that the leverage was excessively bullish in all areas.

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Crypto market participants and behaviour

The crypto market is still dominated by individual investors even if investments from major banks and companies have started to take off, following lobbying and tweets by famous investors. As a result of a more general acceptance of the crypto market and simple access, a lot of amateurs and curious people have entered the market. These first-time entrants to the bitcoin market (mainly young people) are not necessarily used to betting on the financial markets but intrigued by the boom and the freedom that surrounds digital assets. They may be subject to panic sells.

Other big participants, known as whales, also have the potential to influence how markets move. As they hold a large amount of bitcoins, they can change the market trend by placing large buy or sell orders. They feed the “Crypto Fear & Greed Index”, an important metric that represents the emotional state of the crypto markets. People tend to get greedy when the market is rising which results in FOMO (Fear of Missing Out). On the contrary, when the market is down, the index leans to the side of fear. As of now, since the Bitcoin crash of May 19, the Index has been heavily leaning towards the fear side.

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Caroline Jacquard

Seasoned marketing manager with 15+ years of experience in the financial industry: traditional finance, alternative investment and digital assets. Advisor