Last March 12th, Bitcoin fell from USD 7,200 to its lowest point in the last 10 months. The drop in the price of Ether (ETH) also caused liquidations around USD 32 million.
The sudden drop in Bitcoin’s price last March 12th caused the largest number of bullish and bearish position liquidations at the derivatives exchange, BitMEX, in 16 months.
The major cryptocurrency by market capitalization fell from USD 7,200 to its lowest point in the last 10 months, going to USD 5,678 in just 15 minutes and then reaching less than USD 4,700. This took many traders by surprise and forced settlements of USD 702 million on BitMEX. This has been the largest liquidation amount since November 14th, 2018, according to research company Skew.
The drop in price led BitMEX to make sell liquidations of USD 698 million and buy liquidations of USD 4 million. The exchange, located in Seychelles, had recorded total liquidations of USD 750.8 million in November 2018, when the price of Bitcoin dropped dramatically from USD 6,000 to levels below USD 5,000.
Sell liquidation on BitMEX occurs when the market moves adversely against a long position (a bullish bet) and breaks the liquidation price, which is a predetermined limit. When this occurs, the liquidation system automatically closes the long position. Sell liquidations represent the forced liquidation of long positions, while buy liquidations represent the forced liquidation of short positions.
Long Squeeze Liquidation
Whilst long and short positions have been liquidated, over 90% of the liquidations have been for long positions. This indicates that the leverage was mostly contributed to the bullish side. A sudden drop in the price almost always results in long squeeze liquidations, which consequently adds more bearish pressure around the cryptocurrency, driving it downwards.
The drop in Bitcoin’s price to a 10-month low was followed by a temporary recovery, which saw price rebound to USD 6,700. At the time of writing this article, Bitcoin is moving just below USD 6,000, representing a 24% drop on a 24-hour basis.
Joel Kruger, Forex strategist with the LMAX group, said that they believe that there is very strong support in this area. He added that those involved, beyond the late-2017 rally, would be happy to increase their exposure right now. In this way, they would anticipate Bitcoin’s achievement of its goal of being a secure asset and a valuable safeguard.
However, Bitcoin has not yet found a foothold as an anti-risk asset. The decrease in Bitcoin’s price from USD 10,500 to USD 5,700 has accompanied the deterioration of global perspectives and the massive sales in global stock markets.
With the big price movement, the implied volatility of Bitcoin on three-month options has increased to 3.9% per day (74.5% per year), the highest level since January 9th. Implied volatility is a measure of how risky or volatile an asset is expected to be in the future. The greater the uncertainty (volatility), the greater the demand for coverage of purchasing and selling options.
The rise in volatility over the past three months essentially means that traders now expect Bitcoin’s price volatility to remain high for the next 12 weeks.
By Alexander Salazar