The ebb and flow of cryptocurrency prices is a familiar scenario, often presenting a pyrrhic victory for traders. The recent abrupt drop and subsequent recovery in prices is a prime example, revealing liquidation losses of around $256 million within just 48 hours, as reported by Coinglass.
This sequence of frenzied trading activity originated on Monday when market stakeholders capitulated to apprehensions of FTX potentially liquidating its crypto assets. The internet buzz of panic and anticipation sent Bitcoin tumbling; a degradation of value that witnessed Bitcoin‘s descent from a comfortable $26,000 to scarcely below the $25,000 threshold. This had not been observed since mid-June. Simultaneously, Ether hit its half-yearly nadir, with other major cryptocurrencies facing a 5%-10% diminution.
In the resulting turbulence, $167 million faced liquidation, most of which (90%) were leveraged long positions. The day’s tremors virtually mirrored the 17th August pandemonium when Bitcoin’s plunge from $29,000 to below $25,000 caused a seismic shift in the crypto community in a matter of hours.
Predictably, in the aftermath of Monday’s sell-off, traders flocked to short positions expecting a further downslide. However, an unanticipated short squeeze engineered a resurrection in digital asset prices from Monday night, affording Bitcoin a leap of over 4% and catapulting it back above $26,000 by early Tuesday. This resurgence led to another massacre – around $89 million worth of leveraged positions predominantly short were obliterated.
Liquidations designed to close positions due to a trader’s deficit – “margin” – regularly earmark a local bottom or top in prices, as traders unwind their bets following sudden price vacillations.
The aftermath of substantial liquidation events often sees ‘open interest’ – total open options and futures held by the market – plunge drastically, as noted by David Lawant, head of research at institutional exchange FalconX. This has been borne out by the fall in open interest of BTC and Ether derivatives on major exchanges by roughly 38% from the annual high, bringing it close to the levels seen in March.
The powerful washout of open interest in the past half-year underlines the diminished role that future liquidations might play in steering spot price action, Lawant summarised. As the smoke clears from the financial battlefield, traders and crypto-enthusiasts alike will be engaged in analysing the lessons from this roller-coaster ride.
Source: Coindesk
