Based on data from Bybt.com, more than $ 2.7 billion worth of futures contracts have been liquidated in the past 24 hours. This caused the price of Bitcoin (BTC) to see a big drop in a short time frame as it declined from over $ 41,000 to under $ 32,600.
Why would massive liquidations cause Bitcoin to fall?
In the futures market, positions are liquidated because traders borrow additional capital to trade with larger positions.
For example, exchanges in the Bitcoin futures market typically offer leverage of up to 100x. This allows traders to borrow 100 times their starting capital to trade BTC.
The downside to leverage is that when the price of Bitcoin sees a small drop, it can cause a position to be liquidated or become worthless.
Long Lined Up on XBTUSD: Sell 1,235,411 @ 34710.5 ~ Multi kill ~ If You Can Dodge a Liquidation, You Can Dodge Anything
– REKT (@BXRekt) January 11, 2021
For example, let’s say a trader uses leverage 10x and borrows 10x of their capital to buy Bitcoin for $ 40,000. If the price drops 10% to $ 36,000, the position will be liquidated.
When a long position is liquidated, the position is sold to the market. When most of the market is craving for Bitcoin and long contracts start to be liquidated, it creates tremendous selling pressure.
On January 11th, the Bitcoin market saw a tremendous long push caused by large sell orders on Coinbase. While whales or wealthy investors were selling, this caused many long contracts to be liquidated within hours.
The successive liquidations led to a domino effect, resulting in a hefty sell-off and a correction of 16%.
But an optimistic sign is that the correction ended at around $ 32,700, which Whalemap analysts described as a whale cluster support area.
A whale cluster forms when the whales buy Bitcoin at a certain level and don’t move it. This level often turns into a support area as whales are likely to double their participation if a major dip occurs and the price of BTC falls back to that level.
What happens now?
While Bitcoin saw a major decline, overall market sentiment around BTC remains generally optimistic.
Such as Cointelegraph reportedElias Simos, a protocol specialist at Bison Trails, pointed out that the number of whales increased even after Bitcoin saw a major price drop.
The trend shows that whales actually accumulated when the cascade of liquidations happened, which is a positive. Simos wrote:
“Addresses with more than $ 1k BTC continue to grow at the expense of all others, even as this most recent recession begins. While you were selling, whales stored your Bitcoin. “
Analysts at Glassnode, an on-chain analytics firm, explained that Bitcoin’s fundamentals remain intact despite the decline. They emphasized that the hash rate of the Bitcoin network and the difficulty of mining is still high. The analysts noted:
“While $ BTC fell in value today, on-chain fundamentals remain strong, indicating a healthy network. #Bitcoin mining difficulty and hash rate are with ATHs. “
While this current 15% -25% is the biggest setback for this bull cycle to date, it is worth noting that numerous 30% corrections have taken place during Bitcoin’s 2017 bull cycle.
Such as Cointelegraph reported previously, the current price cut of the BTC coincided with a possible bottoming of the Dollar Strength Index.