Bitcoin price is falling, but here are 3 reasons why $ 1 billion liquidations are less common

Bitcoin (BTC) may have struggled to break the $ 36,000 resistance in the past three weeks, but bulls now have one less thing to worry about: tiered futures liquidations.

One might get the impression that a $ 1 billion liquidation is the norm for Bitcoin. However, more than any other price change, traders remember recent exaggerated moves, especially when prices plummet and people lose money.

This negative bias means that even when different price effects of the same order of magnitude occur, unpleasant emotions and events have a more significant impact on a trader’s psychological state.

For example, many studies show that winning $ 500 from the lottery game is two to three times less “impact” than losing the same amount from a player’s personal wallet.

We now have six and a half months in 2021 and there have only been seven liquidations of long-term contracts worth $ 1 billion or more. So these are not the rule, but very unusual situations that can only arise when traders use excessive leverage.

More importantly, there were no short sales of $ 1 billion even when Bitcoin was up 19.4% on Feb. 8. These liquidations only show that long leverage tends to be more reckless and leaves fewer profits on the derivatives exchanges.

While retailers leverage high and end up falling victim to liquidation, more intuitive traders who bet on a decline are likely to be fully insured and take cash carry transactions.

This is one of three reasons why liquidating $ 1 billion futures is not an issue right now.

Cash-and-carry transactions with a low risk of liquidation

Quarterly futures contracts usually do not trade at regular market prices. There is usually a premium when the market is neutral or bullish and is between 5% and 15% annually.

This interest rate (known as the base) is often compared to stablecoin loan rates because the decision to defer payments means the seller will charge a higher price, which creates a price difference.

This situation creates space for arbitrage desks and whales to buy Bitcoin on regular spot exchanges while shorting the futures contract to cash in on the futures contract’s premium.

Although these dealers are shown as “short term interest”, they are actually neutral. Therefore, the outcome does not depend on whether the market is rising or falling.

In the long term, there is no longer any overuse today

Traders were extremely bullish on Bitcoin price as it rose to highs of $ 65,800, but that sentiment turned bearish after brutal liquidations of long contracts from May 11th to May 23rd when BTC rose 53% from $ 58,500 to $ 31,000 fell.

Looking at the funding rate of a perpetual contract (reverse swap) is a great way to gauge investor sentiment. Whenever a little more leverage is required in the long term, the indicator becomes positive.

Until May 20, there was not a day on which the 8-hour funding rate was higher than 0.05%. This evidence suggests that buyers are unwilling to use high leverage, and without it it would be harder to liquidate $ 1 billion or more.

Open interest also drops when the Bitcoin price explodes

Every futures contract requires buyers and sellers of equal size and open interest measures in US dollars. This means that when the Bitcoin price falls, the indicator also falls.

The graph above shows how open futures crossed the $ 20 billion mark in mid-March. During that period, $ 1 billion worth of liquidations accounted for just 5% of the total outstanding.

Given the current open positions of $ 11.8 billion, the same $ 11 billion would account for 8.5% of total contracts.

In summary, staged liquidation is becoming increasingly difficult as buyers are not using excessive leverage and sellers appear to have taken the full risk. If these indicators do not change significantly, the bulls can be left alone.

The views and opinions expressed here are those of author and do not necessarily reflect the views of Cointelegraph. Every investment and trading movement involves risks. You should do your own research when making a decision.