In the midst of the expectation created by the entry of bitcoin as legal tender in El Salvador last Tuesday, September 7, there was the largest drop in the price of bitcoin this year, after the decline of last May. A series of downward price movements in the early morning were followed by steeper falls, of up to 16.9% compared to the initial value of that day.
An analysis by CoinMetrics, published last Tuesday 8 , states that, although the decision taken by El Salvador could have some influence on the initial declines in the price of BTC, the real reason was a rapid succession of liquidations .
«As is often the case, the sudden drop was probably due to a series of strongly leveraged futures position liquidations. More than USD 2,300 million were liquidated last Tuesday, the highest magnitude since May 19 “, says the report.
The price of BTC was rising, and went from USD 39,300 the first of August, to more than $ 52,000 on September 6, the analysis notes. “But on September 7, markets fell precipitously and BTC fell to $ 43,200, a drop of almost $ 10,000.”
Leverage allows you to increase the potential returns of a futures contract, says the analysis. «The effective use of leverage allows a trader to put in a position a capital greater than it owns. But using leverage also amplifies risk, ”the study explains.
As a position becomes more leveraged, specifically for long positions, small price declines can lead to liquidation. While traders have collateral funds that cover a certain percentage of decline, in cases of high leverage the losses can exceed that margin, which causes the liquidation.
The study explains that, in turn, the liquidations They put pressure on prices. When long positions are liquidated, exchanges may be forced to sell, which is downward pressure on price spot . This implies that sell-offs can lead to more sell-offs, or what are called cascading sell-offs, sometimes causing sudden price movements spot , highlights the study.
Although historically, in the markets of futures contracts Of bitcoin and other cryptocurrencies have been allowed high levels of leverage, recently FTX and Binance reduced these capital contributions from 100x to 20x, as reported in this medium.
But apparently these reductions did not have much impact in the number of leveraged futures contracts that were opened, according to the analysis. Open futures interest had risen to May levels before the September 7 crash , says Coin Metrics.
The increase in open interest, in addition to indicating that more contracts are being opened and that additional money is entering the market, also gives a measure of leverage, says the document . “If there is a relatively high amount of open interest, it is very likely that there is a large amount of leverage in the futures market, as contracts are often opened using leverage. As large sell-offs occur, open interest can start to decline rapidly as the market goes down. ”
The graph below shows the open interest of bitcoin. This had grown, prior to the day of Tuesday 7 to USD 19,800 million. However, this local high was well below the April 12 peak of $ 23.5 billion and the May high of $ 21.1 billion, says Coin Metrics.
Although the graph shows that the fall of the open interest of BTC reached a value higher than USD 15,000 million, the report does not give an exact figure. A similar graph from The Block gives the values before and after the crash: USD 19.41 billion and USD 15.4 billion.
Bitcoin market analyst Will Clemente, for his part, confirms that liquidations were the first cause of the market crash, and provides additional data on the sharp decline in its latest market bulletin. USD 1,230 million of long positions were liquidated, which led to a fall in open interest of USD 4,400 million , assures Clemente.
Between other points, the analyst highlights that the predominant sales were of young coins and that the holders long-term (LTH) did not sell, but increased the BTC held . The whales acquired 44,393 BTC in these last week, while on Tuesday 7 there was a boost in these purchases, according to the analyst.
For the analyst, the crash of the This week’s market does not invalidate the market structure or the bullish outlook for bitcoin .
So has this event changed any of the broader trends we’ve been following? The answer is no. In fact, these accumulation trends have only strengthened. Exchange inventories are down another 25,733 BTC (~ $ 1.18 billion) this week, reflected by our supply shock metric. We also saw a rise in currencies moving into strong hands reflected by our illiquid supply shock index this week, including positive momentum on Tuesday.
The following graph shows the momentum of the different supply shock curves during the last seven days.
For his part, analyst Willy Woo agrees with Clemente regarding BTC purchases by whales this week. “Contrary to common opinion, the recent decline in the price of bitcoin was not due to sales of BTC by whales. These have been in a clear buying region, “says Woo in a tweet this Saturday.
The price of BTC continues to fluctuate down in recent days. This Saturday 11 shows a slight recovery after reaching a low of USD 44,400 on Friday night, and is trading at the time of writing this note at USD 45,745, according to the CriptoNoticias price index.
An over-leveraged market with a lot of open futures interest can represent a systemic risk for the price, since what could be a minor drop in the case of moderate leverage, becomes a large correction for the liquidations cascading futures.