Bitcoin in the “red”; should we be worried?
In the night of Saturday to Sunday, Bitcoin price suddenly dropped by thousands of dollars and catching some by surprise. For the Bitcoiners among us who have been around for a while, this was not too much of a shock. However, if you just got started, you might need some time to get used to Bitcoin’s volatility.
Last week everything seemed just perfect after Bitcoin price made it to a new all-time high of $64,863.10. So, how is it possible that Bitcoin experienced such a sudden turnaround? How did the leading cryptocurrency lose that much value in only a few hours?
Was it Coinbase’s direct listing that somehow turned to be disappointing? Was it the decrease in hash rate caused by major power cuts in China? Did a sudden rumor of tightened control in the U.S. cause the dip? Or was it perhaps a huge wave of liquidated long positions on the cryptocurrency? The truth is that it is hard to pinpoint exactly what contributed to the sudden crash.
Volatility
Bitcoin has been around for a little over twelve years now. Yet, amid all excitement, it is easy to forget how relatively small bitcoin actually still is. Bitcoin’s total market capitalization is $1.16 trillion at today’s price. To put Bitcoin’s volatility in perspective it helps to compare it to other markets. Gold roughly has a 10x larger market capitalization, whereas the real estate market has a market capitalization 200 times that of Bitcoin.
To help understand volatility, consider the following. A capital outflow that would cause a 1% drop in the gold market would effectively mean a 10% dip for bitcoin. It simply takes a lot less capital to get the bitcoin price moving when compared to the more mature markets. Knowing this, Bitcoin’s volatility is rather normal for an asset that has yet to mature.
“Dipping” is part of a bull-run
Below you will see a chart of 2017 when we experienced the previous bull-run, resulting in a price of $20,000 per Bitcoin.
During this bull-run, there were a total of six dips of over 30% on the way to a new all-time high. You can imagine that four years ago, such large dips caused panic among people who were not yet fully convinced with Bitcoin. This is exactly what happened. When the price dropped by that much, many newbies sold their Bitcoin on a whim to the hodlers who had much more faith and favor the long term price over the short term.
Another important thing to know is this. When there are heavy price fluctuations in the market, excessive leverage is being liquidated. This is exactly what happened this weekend.
A record number of “long positions”
Sentiment was extremely bullish in the run-up to Coinbase’s direct listing on Nasdaq. Consequently, in anticipation of new price explosions, traders had a record number of long positions open.
This was the perfect recipe for what is called a “long squeeze”. This is a situation where falling prices force investors to sell their long position to avoid further losses. This selling pressure would then lead to the market suddenly dropping even further, leading to a crash.
During a dip, such as this weekend, the price often gets an extra blow because of emotional sellers. Nonetheless, the liquidations of long positions were a big contributor to these deep lows we have experienced. To give you an idea, this past weekend a total of over $9 billion in long positions were liquidated. This was an absolute record in the Bitcoin derivatives market. Previously the highest total liquidations were dated February 23 this year for roughly $5.5 billion.
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Source: igaming
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