Key takeaways:
The recent crash in Bitcoin prices highlights ongoing volatility in the world of spot BTC ETFs, exacerbated by leverage and liquidity challenges that magnify losses.
Liquidations reached a staggering $5 billion, as failures in portfolio margin systems exposed the dangers of using illiquid collateral assets.
Bitcoin derivatives indicate that market makers are exercising caution amid low liquidity and insolvency rumors, leading to a partial market shutdown due to Monday’s US national holiday.
On Friday, Bitcoin (BTC) plummeted by $16,700, representing a 13.7% correction in under eight hours. This drastic decline to $105,000 eliminated 13% of the total open interest in futures contracts. Although the scale of these losses and cascading liquidations is substantial, such occurrences are not out of character for Bitcoin’s historical trends.
Even when excluding the significant “COVID crash” — a remarkable 41.1% drop on March 12, 2020 — which was intensified by liquidation issues and a brief 15-minute outage on BitMEX, Bitcoin has experienced 48 other days of deeper corrections.
A more recent instance happened on Nov. 9, 2022, when Bitcoin faced a 16.1% intraday correction, dropping to $15,590. This event coincided with the collapse of FTX, which escalated following a report revealing that nearly 40% of Alameda Research’s assets were tied up in FTX’s native token, FTT. Subsequently, withdrawals were halted, leading to bankruptcy.
Bitcoin volatility remains high despite ETF-driven market maturity
While one might argue that intraday drops of 10% or more have become less common since the launch of the spot Bitcoin ETF in the United States in January 2024, it may still be too soon to declare a genuine reduction in volatility based on Bitcoin’s historical four-year cycles. Moreover, the market structure has evolved alongside a surge in trading volumes on decentralized exchanges (DEXs).
Events post-ETF have included a 15.4% intraday crash on Aug. 5, 2024, a 13.3% correction on March 5, 2024, and a 10.5% drop just two days following the ETF debut in January 2024. Regardless of these fluctuations, Friday’s $5 billion in Bitcoin futures liquidations indicates that market stabilization could take months, or even years.
Hyperliquid, a perpetual decentralized exchange, noted that $2.6 billion in bullish positions were forcibly closed. Simultaneously, traders on various platforms, including Binance, reported discrepancies in portfolio margin calculations. DEX users also experienced issues with auto-deleveraging, triggered when counterparties fail to meet their margin obligations.
In effect, even traders holding significant gains found some positions unilaterally wiped out, causing serious issues for those utilizing portfolio margin rather than isolated risk management. This predicament isn’t solely due to exchanges or indicative of malpractice; it stems from leveraging in relatively illiquid markets. Certain altcoins experienced declines of 40% or more, resulting in a collapse of traders’ collateral deposits.
During the crash, Bitcoin/USDT perpetual futures traded around 5% below BTC/USD spot prices, and have yet to recover to pre-event levels. Typically, such price discrepancies would offer easy opportunities for market makers, yet it seems something is hindering a return to normalcy.
Related: Crypto.com CEO calls for probe into exchanges after $20B liquidations
While Friday’s downturn clearly caused disruptions, it can also be attributed to thin liquidity on the weekend, particularly with US bond markets closed on Monday for a national holiday. Additional factors could include rumors of insolvency, likely discouraging market makers from taking on further risk.
Consequently, it might take several days for Bitcoin derivatives markets to fully assess the extent of the fallout and for traders to ascertain whether the $105,000 level will act as support, or if further corrections are imminent.
This article is for general informational purposes only and should not be construed as legal or investment advice. The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.
