Nearly $ 1 Billion in Bitcoin (BTCFutures contracts were liquidated on January 13, one day after the major shakeout. The continuous loop of liquidations causes extreme volatility and large price swings in the cryptocurrency market.

Total Bitcoin Liquidations. Source: Bybt.com

What Are Futures Liquidations And Why Are So Many Bitcoin Positions Liquidated?

In the Bitcoin futures market, traders borrow additional capital to bet against or for Bitcoin. The technical term for this is leverage, and when traders use high leverage, the liquidation threshold gets tighter.

For example, if a trader borrows 10 times the initial capital, a 10% price movement in the opposite direction would result in the position being liquidated. Once it is liquidated, the position will become worthless and all initial capital will be lost.

When Bitcoin saw the big 20% ​​drop from $ 41,000 to $ 30,500 on January 12, nearly $ 2 billion worth of futures contracts were liquidated.

However, within 24 hours, another $ 1 billion in contracts were liquidated. Still, there were no major price swings other than the $ 32,000 to $ 35,500 range.

The data indicates that many traders have overused their positions to go short on BTC after it recovered from USD 30,500. As Bitcoin rose to $ 35,500, many short contracts were therefore liquidated.

The cascading liquidations of short contracts are most likely the main reason behind BTC’s rapid 20% relief rally from $ 30,500 to $ 35,500.

The market is less leveraged compared to the past two weeks. The funding rate for futures fluctuates between 0.01% and 0.05%, meaning buyers still represent most of the market, but not dominate the market.

In comparison, when Bitcoin was over $ 40,000, the futures funding rate consistently stayed around 0.1% to 0.15%. This meant that the market was overwhelmed with buyers and traditions from traders.

“Healthy” shake-out

While extreme volatility isn’t beneficial, shaking an overloaded market is healthy and essential for the rest of the rally.

If the Bitcoin market remains extremely congested as it rises above USD 40,000, it risks a much larger correction than 25%.

In previous bull markets, Bitcoin often saw a 30% to 40% relapse, and as such, the recent drop from $ 42,000 to almost $ 30,000 is nothing special for a BTC bull market.

Additionally, as the pseudonymous trader known as “Byzantine General” pointed out, the $ 30,000 area has become a major support level.

The cooling of the Bitcoin futures market as USD 30,000 solidifies as a support area is very optimistic for BTC’s medium-term outlook.

Whale Clusters also identify the $ 30,000 level as a whale cluster support, meaning that this psychological level will definitely be defended by the bulls if the price turns south.