Crypto Automated Trading

Bulls Liquidated

There is one thing that beginner traders rarely understand about bull markets. Traders can lose money in a bull market as much as in a bear market. This week reminded us about the brutal volatility that makes crypto both loved and feared. The market briefly went into a tailspin after a rejection just above the $69,000 previous all-time high. The Bitcoin price then found its feet again and marched back up. But not without liquidating many a trader with an aggressive leverage long position in place.

Bull markets in crypto are prone to rapid and steep drops, which they usually recover quickly from. Areas of heavy selling trigger these drops, which causes other traders to sell even more, resulting in a cascading effect. One of these areas was the previous Bitcoin All-Time-High price. Spot trading would not be affected, but slight drops in price breaks highly leveraged bets because there isn’t enough collateral to cover their declining positions. This leads to more sales and forced closings. We saw the first major instance of a “liquidation cascade” on Tuesday in this bull market. The event removed over $3 billion of open interest in Bitcoin, making it the largest liquidation event in the last six months.

The funding rate requires ‘cleansing’ to maintain longer-term price movements. Funding rates are used in futures markets where leverage can encourage either long or short positions. The futures price of the asset will match the index spot price. Before the reset, Funding for all assets sat at around 100% APR. After the initial drop, the rate dropped to 20% APR within a few hours. Shorting becomes less attractive and profitable when funding is lower. But higher funding rates are likely to continue. BTC and other currencies will be longed once again by traders as they strive for new highs. That is the formula of a bull market.

In previous cycles, price corrections were accompanied by a certain amount of confidence gain due to the need for resetting funding rates. This cycle, however, the seemingly endless spot demand from ETFs provided an additional layer of comfort. Blackrock’s IBIT experienced $788 million of inflows on Tuesday this week – a new record. The ETFs’ combined net inflows totalled $648 million – their third highest. The trading volume of ETFs has also surpassed $10 billion, with traders taking advantage of the volatility. Unsurprisingly, traders quickly bought up the price dip. We remain firmly in Bull Market territory. But keep in mind, if you overleverage your position, you could live to regret it.