Main Insights:
Friday’s Bitcoin price decline illustrates ongoing volatility in the spot BTC ETF landscape, with leverage and liquidity strain exacerbating losses.
Liquidations reached $5 billion as portfolio margin systems faltered, underscoring the dangers associated with illiquid collateral assets.
Bitcoin derivatives indicate that market makers are remaining cautious due to low liquidity, insolvency speculation, and the upcoming US national holiday on Monday, causing a partial market shutdown.
Bitcoin (BTC) dropped to $16,700 on Friday, reflecting a 13.7% decrease in under eight hours. The dramatic fall to $105,000 eliminated 13% of total futures open interest in BTC terms. Even with the significant losses and widespread liquidations, these statistics are not out of the ordinary in Bitcoin’s history.
Even when excluding the “COVID crash” — a notable 41.1% intraday fall on March 12, 2020 — likely intensified by liquidation issues and a brief 15-minute outage on BitMEX, Bitcoin has experienced 48 other days of even larger declines.
A more recent instance occurred on Nov. 9, 2022, when Bitcoin faced a 16.1% intraday drop to $15,590, coinciding with the FTX collapse, escalated by news that nearly 40% of Alameda Research’s assets were linked to FTX’s native token, FTT. Sam Bankman-Fried’s conglomerate subsequently halted withdrawals and filed for bankruptcy.
Bitcoin Volatility Remains Elevated Despite ETF Market Evolution
While one might argue that intraday crashes of 10% or more have decreased since the launch of the spot Bitcoin ETF in the United States in January 2024, it may be too early to say that volatility has genuinely subsided, especially given Bitcoin’s historical four-year cycle. Additionally, the market structure has shifted as trading volumes on decentralized exchanges (DEXs) have increased.
Notable post-ETF events include a 15.4% intraday drop on Aug. 5, 2024, a 13.3% decline on March 5, 2024, and a 10.5% plunge just two days after the spot ETF launch in January 2024. Nonetheless, Friday’s $5 billion in Bitcoin futures liquidations indicates a lengthy road to market stabilization.
Hyperliquid, a perpetual decentralized exchange, reported that $2.6 billion in bullish positions were forcibly closed. Simultaneously, traders on various platforms, including Binance, faced issues with portfolio margin calculations, and DEX users experienced auto-deleveraging due to counterparties failing to meet margin requirements.
Consequently, even traders with substantial gains saw certain positions terminated unilaterally, leading to significant issues for those relying on portfolio margin instead of isolated risk management. This is not solely a fault of exchanges or indicative of malpractice; rather, it stems from leveraging in relatively illiquid markets. Some altcoins fell by 40% or more, resulting in the collapse of traders’ collateral deposits.
During the crash, Bitcoin/USDT perpetual futures traded approximately 5% below BTC/USD spot prices and have yet to rebound to pre-event levels. Typically, such discrepancies would offer easy opportunities for market makers, yet something seems to be hindering a return to normal conditions.
Related: Crypto.com CEO calls for investigation into exchanges following $20B liquidations
Friday’s crash, while a clear disruption, may also be attributed to reduced liquidity over the weekend, especially with the US bond markets closing on Monday for a national holiday. Potential contributing factors also include insolvency rumors, which may have caused market makers to avoid taking on further risk.
Consequently, it may take several days for Bitcoin derivatives markets to fully assess the extent of the damage and for traders to determine whether the $105,000 level can act as support or if further corrections are imminent.
This article is intended for informational purposes only and should not be construed as legal or investment advice. The views, thoughts, and opinions expressed herein are solely those of the author and do not necessarily represent the views and opinions of Cointelegraph.
