Based on data from Bybt.com, over $ 2.7 billion of futures contracts have been liquidated in the past 24 hours. This caused the price of Bitcoin (BTC) to drop sharply in a short period of time as it fell from over $ 41,000 to below $ 32,600.
BTC / USDT 4-hour price chart (Binance). Source: TradingView.com
Why would mass liquidations cause Bitcoin to fall?
Positions are liquidated on the futures market as traders raise additional capital to trade larger positions.
For example, exchanges in the Bitcoin futures market typically offer up to 100x leverage. This enables traders to borrow 100 times their initial capital to trade BTC.
The disadvantage of leverage is that a small drop in Bitcoin price can result in a position being liquidated or worthless.
Long liquidated on XBTUSD: Sell 1,235,411 @ 34710.5 ~ Multi Kill ~ If you can avoid liquidation, you can avoid anything
– REKT (@BXRekt) January 11, 2021
For example, let’s say a trader uses 10 times leverage and borrows 10 times their capital to buy Bitcoin for $ 40,000. If the price drops 10% to $ 36,000, the position will be liquidated.
When a long position is liquidated, the position is sold to the market. So when the majority of the market yearns for Bitcoin and long contracts are liquidated, there is massive selling pressure.
On January 11th, the Bitcoin market experienced a massive long squeeze triggered by large sell orders on Coinbase. When whales or wealthy investors were sold, many long contracts were liquidated in a matter of hours.
The successive liquidations created a domino effect that resulted in a heavy sell-off and a correction of 16%.
One bullish sign, however, is that the correction ended at around $ 32,700, which whale map analysts identified as a support area for whale clusters.
A whale pile forms when the whales buy bitcoin at a certain level and don’t move. This level often becomes a support area as whales are likely to double their entries if there is a sharp drop and the price of BTC falls back to this level.
Bitcoin whale clusters predicted a massive decline. Source: Whalemap
What happens next?
Although Bitcoin has seen a sharp decline, general market sentiment around BTC remains generally bullish.
As reported by Cointelegraph, Elias Simos, a protocol specialist at Bison Trails, found that the number of whales actually increased after Bitcoin saw a sharp drop in prices.
The trend shows that whales actually pooled when the liquidation cascade occurred, which is positive. Simos wrote:
“Addresses with more than 1,000 BTC will continue to grow at the expense of everyone else – even if this latest downturn takes effect. While you were selling, whales devoured your bitcoin. “
Analysts at Glassnode, an on-chain analytics firm, said Bitcoin’s fundamentals remain intact despite the decline. They stressed that the Bitcoin network’s hash rate and mining difficulty are still at their peak. The analysts found:
“While BTC lost value today, fundamentals remain strong in the chain, indicating a healthy network. # Bitcoin mining difficulty and hash rate are at ATHs. ”
While this current 15% -25% is the biggest pull-back for this bull cycle yet, it’s worth noting that Bitcoin made numerous 30% corrections during the 2017 bull cycle.
As Cointelegraph previously reported, the current BTC price decline coincides with a possible bottoming of the Dollar Strength Index.