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Bitcoin’s aggressive moves are driven by much more than the upcoming China crackdown or Elon Musk’s headline.
According to analysts, traders taking excessive risks in the unregulated cryptocurrency market and forced to sell when prices fall are largely responsible for the 30% drop in prices last week and the outages of major exchanges. A booming bitcoin lending market also adds to the volatility.
The price of cryptocurrencies fell last week, with bitcoin losing about a third of its value in a matter of hours. Bitcoin hit nearly $ 40,000 on Monday, but is still down around 33% from its peak.
When traders use the margin, they are essentially borrowing from their brokerage firm to take a larger position in bitcoin. If the prices drop, they have to pay the brokerage company back in what is called a “margin call”. As part of this, there is often a fixed price that triggers the sale to ensure that traders can refund the exchange.
Brian Kelly, CEO of BKCM, highlighted Asian companies such as BitMEX allowing 100 to 1 leverage for cryptocurrency transactions. Robinhood does not allow traders to use margin for cryptocurrency, and Coinbase only allows professional traders.
“You get that crowd factor, everyone’s liquidation price tends to be a little close to everyone’s – when you hit that all of those automatic sell orders come in and the price just goes down.” Kelly told CNBC.
Bitcoin traders liquidated around $ 12 billion in leveraged positions last week as the price of the cryptocurrency skyrocketed, according to bybt.com. This massive exodus wiped out around 800,000 crypto accounts.
“Selling leads to more sales until you strike a balance on leverage in the system,” said Devin Ryan, JMP analyst. This sale is starting to “worsen” as the leveraged positions are liquidated because they cannot meet those margin requirements, he said.
“Leverage in the crypto markets, particularly on the retail side, has been a significant theme that heightens volatility,” Ryan added.
As the crypto market grows, Ryan said he expects leverage to become less influential, especially as more institutional capital arrives.
Investors, both retail and institutional, invested in bitcoin and other digital assets in 2021. The world’s largest cryptocurrency exchange, Coinbase, said trading volume in the first quarter of the year year was $ 335 billion, of which approximately $ 120 billion retail and $ 215 billion were institutional. Transaction volumes totaled around $ 30 billion in the first quarter of 2020.
Mark Cuban weighed in on the leverage aspect for Ether, the world’s second largest cryptocurrency, on Twitter last week.
“Leverage markets are crushed. It doesn’t matter what asset. Stocks. Crypto.Debt.Houses. They lead to forced sell-offs and lower prices. But crypto has the same problem as [high-frequency traders] bring to actions, running forward is legal, as gasoline charges introduce latency that can be played, ”Cuban said in a tweet last week.
Ready
The other behind-the-scenes selling cause may come from the growing bitcoin lending market.
Crypto companies like BlockFi and Celsius allow bitcoin holders to store their crypto with the company, in exchange for an interest rate of between 6% and 8%. At the back, these companies lend bitcoin to hedge funds and other professional traders. They also allow people to use their bitcoin holdings as collateral for loans.
For example, if someone took out a $ 1 million bitcoin-backed loan and the price drops 30%, they may owe the lender 30% more.
“When you reach a certain level of collateral, companies will automatically sell your bitcoin and send the collateral to the lender,” said Brian Kelly of BKCM. “It adds to the massive cascading effect – there was so much volume that most trades were broken.”
Regulation
The fact that bitcoin is not regulated by a central bank is part of what makes it so valuable to its investors.
But this lack of central authority and increased adoption has put a target on the backs of some in Washington. The Treasury Department announced Thursday that it will require any transfers of $ 10,000 or more in crypto to be reported to the Internal Revenue Service.
“The market doesn’t have the same safety nets as other more traditional markets,” Ryan said. “In some ways, the crypto markets are cleaner and they are not influenced by a buyer of last resort. “
Still, Ryan said the regulation can be seen as validation of the crypto market and could be positive for the digital asset.
“The crypto markets are still in their infancy compared to other asset classes and they are therefore going through a phase of maturation where they are developing and adoption is increasing, it is still relatively nascent,” did he declare. “Volatility is a hallmark here just as the market develops,” Ryan said.
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