Important points:
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Friday’s collapse in Bitcoin prices shows that volatility persists in the spot BTC ETF era, with leverage and liquidity stress compounding losses.
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Liquidations reached $5 billion as the portfolio’s margin system malfunctioned, highlighting the risks of illiquid collateral assets.
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Bitcoin derivatives suggest market makers remain cautious amid low liquidity, rumors of bankruptcy and a U.S. public holiday on Monday that shut down parts of the market.
Bitcoin (BTC) plummeted $16,700 on Friday, marking a 13.7% correction in less than eight hours. The plunge to $105,000 wiped out 13% of the total futures open interest in BTC terms. Despite huge losses and chain liquidations, these numbers are by no means unique in Bitcoin’s history.
Even excluding the “coronavirus crash” (a staggering 41.1% intraday drop on March 12, 2020), which may have been magnified by BitMEX, the leading Bitcoin derivatives exchange at the time, facing liquidation issues and a brief 15-minute outage, there are 48 other days when Bitcoin endured a more severe correction.
A more recent example occurred on November 9, 2022, when Bitcoin underwent an intraday correction of 16.1%, plummeting to $15,590. This episode coincided with the FTX collapse, which escalated after a report revealed that about 40% of Alameda Research’s assets were tied to FTX’s native token, FTT. Sam Bankman Freed’s conglomerate quickly halted withdrawals and eventually filed for bankruptcy.
Despite ETF-led market maturation, Bitcoin volatility remains high
Some might argue that intraday crashes of 10% or more have become rarer since the establishment of the Spot Bitcoin exchange-traded fund (ETF) in the United States in January 2024. Still, given Bitcoin’s historic four-year cycle, it may be premature to claim that volatility has truly eased. Furthermore, as the trading volume of decentralized exchanges (DEX) has rapidly increased, the market structure itself has evolved.
The post-ETF events in question include a 15.4% intraday crash on August 5, 2024, a 13.3% correction on March 5, 2024, and a 10.5% decline just two days after the spot ETF debut in January 2024. Regardless of specific price movements, Friday’s $5 billion in Bitcoin futures liquidations suggests it could be months or even years before the market fully stabilizes.
HyperLiquid, a perpetual decentralized exchange, reported that $2.6 billion of bullish positions were forced closed. Meanwhile, traders on several platforms, including Binance, reported issues with portfolio margin calculations. At the same time, DEX users complained about the automatic deleveraging that occurs when trading partners do not meet margin requirements.
Essentially, even traders who were making significant profits saw some positions unilaterally exited, creating a huge problem for traders using portfolio margin rather than individual risk management. This situation is not necessarily due to exchange flaws or evidence of fraud. This is a byproduct of using leverage in a relatively illiquid market. Some altcoins plummeted by more than 40%, causing traders’ collateralized deposits to plummet.
Bitcoin/USDT perpetual futures were trading around 5% below the spot price of BTC/USD during the crash and have yet to recover to pre-event levels. Normally, a discrepancy like this would be an easy opportunity for market makers, but something seems to be preventing things from returning to normal.
Related: Crypto.com CEO demands investigation into exchange after $20 billion liquidation
While Friday’s selloff was clearly indicative of turmoil, it may also have been due to thin liquidity over the weekend, especially since the U.S. bond market was closed for a holiday on Monday. Other potential factors include rumors of bankruptcy, which may have prompted market makers to avoid further risk.
As a result, it could take several days for the Bitcoin derivatives market to fully grasp the extent of the damage and for traders to determine whether the $105,000 level provides support or whether further correction is in store.
This article is for general informational purposes only and is not intended to be, and should not be taken as, legal or investment advice. The views, ideas, and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
