Bitcoin: Low risk of ‘liquidation-induced price volatility’ after 70% YTD surge

Bitcoin ( BTC ) is up 70 percent this year, hitting a nine-month high of more than $29,000. Although the strong rebound has revived the derivatives market, the use of leverage is generally not obvious, indicating that the risk of sharp price fluctuations caused by “liquidation” is not great.

Forced liquidation refers to the forced liquidation of long and short positions in the leveraged perpetual futures market, allowing traders to open positions whose value is much higher than the deposit amount as margin. Liquidation in cash or cash equivalents occurs when a trading entity fails to meet a margin shortfall as the market moves in a bullish/bearish direction.

When market leverage levels (measured as the ratio between the dollar value locked in perpetual futures contracts (open interest) and the cryptocurrency market cap) are high, short liquidation can exacerbate a bullish move. In turn, this creates more short positions, which leads to a short squeeze. Likewise, long liquidation exacerbated the bearish movement, resulting in a long squeeze.

In the bull market in 2021 and the early bear market in 2022, the leverage ratio exceeds the market size is quite high, and the price fluctuation will shake the position. Leveraged positions worth billions of dollars. This rate has been declining so far.

Analysts at Blockware Solutions stated:

“High open interest relative to market capitalization means the market may be vulnerable to short squeezes or liquidations, which would lead to more volatility in prices than if forced to buy or sell futures. Application.”

“The medium-term OI/cap downtrend has not been broken, which ensures that prices will most likely not fall to the levels seen at the start of the year even amid low volatility.”

Open interest/market capitalization continues to decline, suggesting liquidations are less likely. Source: Blockware Solutions, Glassnode

Open interest in the perpetual futures market has been falling since the bankruptcy of FTX, the former third-largest cryptocurrency exchange and one of the preferred ways to trade perpetual futures, in early November.

According to Blockware Solutions, despite the recent consolidation, the ratio remains low, indicating a low risk appetite among investors.

“Bitcoin has basically been trading sideways for the past three weeks, however, we have not seen an increase in open interest. This is a signal that the market is still in risk-on mode,” the Blockware analyst noted, adding that there will be no Long-term perpetual futures contracts typically capture demand during price cycles. As predicted by the boom in FTX.

Bitcoin has been locked in a tight range between $29,000 and $27,000 since March 21.

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board take

According to CoinDesk

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