Bitcoin price is down, but here’s 3 reasons why $1B liquidations are less frequent
Bitcoin has been on a tear lately, rallying by more than 40 percent in the last month. The cryptocurrency has enjoyed massive gains as a result of increased investor interest, which has driven prices to record highs. However, those who chose to trade in bitcoin are feeling the effects of this rally too. The cryptocurrency market is also seeing a new wave of cryptocurrency-related funds. While bitcoin is still the market leader, the emergence of new coins and the institutionalization of bitcoin are likely to change the cryptocurrency landscape.
As Bitcoin continues to hit new lows, the crypto community is in a panic. Ever since the last market correction three months ago, Bitcoin is down about 50% from its all-time high of US$20,000. Bitcoin has been experiencing periods of volatility for the better part of a year now, and the community is still coming to terms with the fact that the cryptocurrency market is prone to downturns and corrections. Although the market has been volatile for the past few months, it is important to note that there are good reasons for the Bitcoin price to fluctuate; these are not “panic attacks” or “flash crashes.”
Bitcoin (BTC) might be struggling to break the $36,000 resistance for the past three weeks, but bulls now have one less thing to worry about: cascading futures contracts liquidations.
One might be under the impression that a $1 billion liquidation is usual for Bitcoin. Still, traders tend to remember the most recent exaggerated movements more than any other price shifts, especially when the price crashes and people lose money.
This negativity bias means that even when various price impacts with equal intensity occur, the unpleasant emotions and events have a more significant effect on a trader’s psychological state.
For example, multiple studies show that winning $500 from playing the lottery is two to three times less ‘impactful’ than losing the same amount from the gambler’s personal wallet.
Bitcoin futures (quarterly and perpetual) aggregate open interest. Source: Bybt
The above chart shows how the futures open interest surpassed $20 billion by mid-March. During that period, a $1 billion liquidation represented a mere 5% of the outstanding total.
Considering the current $11.8 billion open interest, the same $1 billion amount would represent 8.5% of the aggregate number of contracts.
In a nutshell, it is becoming much more difficult for cascading liquidations to take place because buyers are not using excessive leverage, and sellers appear to be fully hedged. Unless these indicators shift significantly, bulls can remain in peace.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.
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