$1 billion in futures contracts have been settled: Why is Bitcoin going through extreme price movements?
An additional $1 billion in Bitcoin futures contracts have been destroyed. Almost $1 billion in Bitcoin Futures Contracts (BTC) were liquidated on January 13, a day after a major market shake. …
An additional $1 billion in Bitcoin futures contracts have been destroyed.
Almost $1 billion in Bitcoin Futures Contracts (BTC) were liquidated on January 13, a day after a major market shake. The continuous cycle of settlements is causing extreme volatility and large price swings in the cryptomino market.
What are futures settlements and why are so many Bitcoin positions being settled?
In the Bitcoin Profit futures market, traders borrow additional capital to bet for or against Bitcoin. The technical term for this is leverage, and when traders use high leverage, the settlement limit gets tighter.
For example, if a trader borrows 10 times the initial capital, a 10% movement of the price in the opposite direction would cause the position to liquidate. Once liquidated, the position loses value and all initial capital is lost.
When Bitcoin has a large drop of 20%, like the one that occurred when the price went from $41,000 to $30,500 on January 12, almost $2 billion in futures contracts were liquidated.
However, after 24 hours, contracts worth $1 billion were also liquidated. Still, there were no major price swings beyond the $32,000 to $35,500 range.
The data indicates that many traders have over-leveraged their positions to sell BTC after it recovered from $30,500. Therefore, as Bitcoin rose to $35,500, many short contracts were liquidated.
Cascading short contracts is probably the main reason behind BTC’s rapid 20% recovery from $30,500 to $35,500.
The market is less leveraged compared to the last two weeks. The rate of future financing is moving between 0.01% and 0.05%, which means that buyers still account for most of the market, but are not dominating it.
In comparison, when Bitcoin was above $40,000, the future funding rate remained consistently around 0.1% to 0.15%. This meant that the market was being made up mostly of overbidding buyers and traders.
Although the extreme volatility is not favorable, the shock of a super high market is healthy and essential for the continuation of the boom.
If the Bitcoin market remains extremely overvailed while rising above $40,000, there is a risk of a correction much greater than 25%.
In previous bullish markets, Bitcoin has often experienced retractions of 30% to 40% and as such, the recent drop from $42,000 to almost $30,000 is nothing out of the ordinary for a BTC bullish market.
Moreover, as noted by the pseudonym known as „General Byzantine“, the $30,000 area has become an important level of support.
30k is a very significant support, I don’t think it will yield .$BTC pic.twitter.com/ddThmeXSAK yet.
– Byzantine General (@ByzGeneral) January 13, 2021
Bitcoin’s future market is cooling while solidifying the $30,000 as a support area, which is highly optimistic in a medium-term perspective for BTC.
Whale groupings also identify the $30,000 level as a support area for groupings of whales, which means that this psychological level will certainly be defended by bulls.