Key takeaways:
Friday’s Bitcoin crash highlights ongoing volatility in the spot BTC ETF landscape, with leverage and liquidity pressures amplifying losses.
Liquidations reached $5 billion as portfolio margin systems struggled, underscoring the risks associated with illiquid collateral assets.
Bitcoin derivatives indicate that market makers are cautious amid low liquidity, insolvency speculations, and Monday’s US national holiday, resulting in a partial market shutdown.
Bitcoin (BTC) dropped by $16,700 on Friday, representing a 13.7% correction in under eight hours. This rapid decline to $105,000 eliminated 13% of total BTC futures open interest. Despite the significant liquidations and steep losses, such occurrences are not unprecedented in Bitcoin’s history.
Excluding the notable “COVID crash” — a staggering 41.1% intraday drop on March 12, 2020 — which was worsened by liquidation issues at BitMEX and a brief outage, there have been 48 other instances where Bitcoin faced even steeper corrections.
A recent instance occurred on Nov. 9, 2022, when Bitcoin experienced a 16.1% intraday correction, falling to $15,590. This incident coincided with the FTX collapse, triggered by revelations that nearly 40% of Alameda Research’s assets were linked to the native FTX token, FTT. Sam Bankman-Fried’s enterprise halted withdrawals and eventually declared bankruptcy.
Bitcoin volatility remains high despite ETF-driven market maturity
It’s arguable that 10% or greater intraday crashes have diminished since the US launch of the spot Bitcoin ETF in January 2024. However, given Bitcoin’s historical four-year cycle, it’s too early to assert that volatility has genuinely subsided. Additionally, the market structure has shifted with increased trading volumes on decentralized exchanges (DEXs).
Post-ETF incidents include a 15.4% intraday crash on Aug. 5, 2024, a 13.3% correction on March 5, 2024, and a 10.5% decline just two days following the ETF’s debut in January 2024. Regardless of the specific price movements, Friday’s $5 billion in futures liquidations indicates that it may take months or years for market stabilization.
Hyperliquid, a perpetual decentralized exchange, reported that $2.6 billion in bullish positions were forcibly closed. Traders on several platforms, such as Binance, experienced issues with portfolio margin calculations, while DEX users faced auto-deleveraging when margin requirements were unmet.
In essence, even traders with significant gains experienced unilateral position terminations, presenting challenges for those utilizing portfolio margin instead of isolated risk management. This scenario is not necessarily due to exchanges’ faults or malpractice; it stems from leveraging in relatively illiquid markets. Some altcoins experienced drops over 40%, leading to massive declines in traders’ collateral deposits.
During the crash, Bitcoin/USDT perpetual futures traded roughly 5% below BTC/USD spot prices and have yet to return to pre-crash levels. Typically, such price differences would provide opportunities for market makers, yet something seems to be hindering a return to normalcy.
Related: Crypto.com CEO calls for investigation into exchanges after $20B liquidations
While Friday’s crash clearly caused disruption, it could also be due to thin liquidity over the weekend, particularly with US bond markets closed on Monday for a national holiday. Additional factors may include insolvency rumors, which likely made market makers cautious about taking on further risk.
Consequently, it could take several days for Bitcoin derivatives markets to assess the full extent of the impact and for traders to ascertain whether the $105,000 level will act as support or if further declines lie ahead.
This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
