3 reasons $ 1 billion worth of liquidations are cooling off despite Bitcoin’s dismal price

Since the start of the year, crypto derivatives traders have had some tough times, but the current situation looks much brighter for bitcoin bulls.

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

While a $ 1 billion liquidation is normal for Bitcoin, traders are more likely to remember recent big moves than any other price change, especially when the price collapses and people are losing money.

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

For example, many studies show that winning $ 500 from the lottery game is 2-3x less of an impact than losing the same amount from your personal wallet.

Summary of the liquidation of Bitcoin futures (red = long order) | Source: Coinalyze

Now halfway through 2021, there have only been 7 liquidations of long contracts worth $ 1 billion or more. So instead of becoming the norm, these are very unusual situations that can only happen when traders use excessive leverage.

More importantly, there were no short liquidations worth $ 1 billion even when Bitcoin was up 19.4% on Feb.8.

While retailers use high leverage and end up falling victim to liquidation, more sober traders who bet on falling prices are likely to be fully insured and execute “cash” trades

“.

Is a trading strategy that takes advantage of market price differences. It usually requires a spot long position while shorting futures or options.

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

Cash and carry trading has a low risk of liquidation

Quarterly futures contracts are often not traded 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 and this will result in 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 traders are shown as “Interest Short (**)”, they are actually neutral. Therefore, the outcome does not depend on whether the market is rising or falling.

(**) The number of stocks that have been sold short but not sold out or closed. It can be expressed as a number or as a percentage, which is an indicator of market sentiment.

Long orders no longer use excessive leverage

The funding rate of perpetual contracts (reverse swaps) is a good way to gauge investor sentiment. Whenever the long side requires more leverage, the indicator becomes positive. Bitcoin price is falling, but here are 3 reasons why $ 1 billion liquidations are less common Financing rate for the perpetual Bitcoin futures contract

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Source: Bybt

Until May 20, there was not a day on which the 8-hour production rate was higher than 0.05%. This evidence suggests that buyers don’t want to use high leverage, and without it, it’s difficult to get liquidations worth $ 1 billion or more.

Each futures contract requires a buyer and seller of the same size, and the Open Interest (OI) measures the total face value in US dollars. This means that when the Bitcoin price falls, the indicator also falls. Bitcoin price is falling, but here are 3 reasons why $ 1 billion liquidations are less common Bitcoin Futures OI Aggregation (quarterly and permanent)

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Source: Bybt

The graph above shows how futures open interest topped $ 20 billion in mid-March. During this period, the $ 1 billion liquidation is only 5% of the total outstanding.

If you consider that OI is currently worth $ 11.8 billion, the same $ 1 billion would make up 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.

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