$5.4bn worth of Bitcoin Derivatives Liquidated

$5.4bn worth of Bitcoin Derivatives Liquidated
  • Bitcoin Price significantly dropped from $57k to $42k within an hour
  • Prices have stabilised between a range of $47k to $49k
  • Spot selling triggered long squeeze during late US / early Asia hours on the night of Friday to Saturday
  • On-Chain metrics confirm leverage flush amongst short-term traders

Weekend Price Action

Bitcoin Weekend Price Action

Timeline of events

  • Significant sell order of Bitcoin Perpetual Futures was placed on Deribit during low liquidity hours (late US / early Asia Friday to Saturday date switch)

  • The size and timing of the sell order triggered the liquidation of long positions which dropped prices below local support levels of $53k

  • The next wave of liquidations came in a couple of minutes after which pushed prices down to $48k

  • After 15-20 mins of price stability, volumes shot up along with additional liquidations which sent prices down to lows of $42k last seen in September

  • Prices reversed back up to $47.5k within minutes and have since traded within a range of $47k-$49k

Another Leverage Flush ?

The bitcoin market has experienced several sudden corrections as a result of overleveraged derivatives positions in recent months. Investors get overconfident and open long positions whilst taking on an excessive amount of leverage.

Last weekend was no different as 'Bitcoin Futures Open Interest Perpetual' was near its all-time high.A slight decline in price caused by spot selling triggered the liquidation of several long positions, many of which were opened with leverage, which plunged prices to multi-month lows.

We can observe a significant drop in 'Futures Open Interest Perpetual' on the 4th of December, as the metric neared its all-time high levels before dropping by 22%.

Have prices bottomed ?

Interestingly, whenever the funding rates for Bitcoin Futures Perpetuals turns negative or red, prices have tended to bottom. With the most recent liquidation of open interest, funding rates have returned to negative for the first time since September.

This confirms the liquidation of long positions over the weekend as now more BTC shorts are paying BTC longs on a net basis. It will be interesting to see if the pattern observed over the past year remains, and this correction proves to be a local bottom.

Bitcoin Futures Perpetual Funding Rate

Long-Term Holders Keep Holding

The majority of coins spent during the recent correction were held by short-term traders. Long-term holders were not implicated in the leverage flush as most of the long positions were opened by short-term traders with young coins.

This can be observed with the graph below which provides a breakdown of the various 'Age Bands' of coins spent. Coins younger than a month have been filtered out, to show only those coins that have been held for longer than 30 days.

There was no increase in spent volume of coins older than a month over the weekend, despite the 22% price correction. This suggests that most of the volume over the weekend came from coins younger than a month.

Short-term holders exchanged young coins amongst themselves, whereas older coins mostly stayed dormant. This is constructive for the long-term as the leverage flush was solely driven by short-term traders and not long-term holders.

Most of the excessive leverage has been flushed from the Bitcoin market. This provides a clear path for healthy price development moving forward.