The Surprise: Bitcoin’s Price Drop Causes $900 Million in Liquidations
The recent drop in the price of Bitcoin took many traders by surprise. From August 16 to August 18, the price fell by 11.5%, resulting in $900 million worth of long positions being liquidated. This caused the price to hit a two-month low. Prior to the drop, many traders expected a breakout in volatility that would push the price upward, but that was obviously not the case. With the substantial liquidations, it’s important to address whether professional traders gained from the price crash.
The Surprise: Bitcoin’s Price Drop Causes $900 Million in Liquidations
Bitcoin just saw one of its largest daily liquidations by volume in history. On August 18, the cryptocurrency fell 7.5% in just 20 minutes, erasing $42 billion in market cap. This mass-liquidation event involved more outflows in one day than during the collapse of FTX in November. The sudden drop caught many traders off guard and resulted in significant financial losses.
Did Professional Traders Gain from Bitcoin’s Price Crash?
There’s a common belief among cryptocurrency traders that whales and market makers have an edge in predicting significant price shifts and that this allows them to gain the upper hand over retail traders. This notion holds some truth, as advanced quantitative trading software and strategically positioned servers come into play. However, this doesn’t make professional traders immune to substantial financial losses when the market gets shaky.
For larger-sized and professional traders, a majority of their positions may be fully hedged. Comparing these positions with previous trading days allows for estimations on whether recent movements anticipated a widespread correction in the cryptocurrency market.
Margin Trading: A Look at Professional Traders’ Positions
Margin trading lets investors magnify their positions by borrowing stablecoins and using the funds to acquire more cryptocurrency. Bitfinex margin traders are known for swiftly establishing position contracts of 10,000 BTC or greater, underscoring the involvement of whales and substantial arbitrage desks.
As depicted in the chart, the Bitfinex margin long position on Aug. 15 stood at 94,240 BTC, nearing its highest point in four months. This suggests that professional traders were entirely caught off guard by the abrupt BTC price crash.
Unlike futures contracts, the equilibrium between margin longs and shorts isn’t inherently balanced. A high margin lending ratio signifies a bullish market, while a low ratio suggests a bearish sentiment. The OKX BTC margin lending ratio reached 35 times in favor of long positions on Aug. 16, aligning with the preceding seven-day average. This information supports the argument that professional traders were unprepared for any form of negative price movement.
Futures Data Indicates Lack of Preparation among Traders
The net long-to-short ratio of the top traders excludes external factors that may have exclusively influenced the margin markets. By consolidating positions across perpetual and quarterly futures contracts, a clearer insight can be gained into whether professional traders are leaning toward a bullish or bearish stance.
Prior to the release of the Federal Reserve’s Federal Open Market Committee minutes on Aug. 16, prominent BTC traders on Binance exhibited a long-to-short ratio of 1.37, aligning with the peak levels observed in the previous four days. A similar pattern emerged on OKX, where the long-to-short indicator for Bitcoin’s leading traders reached 1.45 moments before the BTC price correction commenced.
Irrespective of whether those whales and market makers augmented or diminished their positions post the initiation of the crash, data stemming from BTC futures further substantiates the lack of readiness in terms of reducing exposure prior to Aug. 16, be it in futures or margin markets. Consequently, a reasonable assumption can be made that professional traders were taken by surprise and did not profit from the price crash.
The recent price drop in Bitcoin led to significant liquidations and caught many professional traders off guard. Despite the common belief that professional traders have an edge in predicting price shifts, they were unable to anticipate the extent of the price drop. Margin trading and futures data indicate that professional traders were unprepared for the negative price movement. This highlights the risks involved in cryptocurrency trading, even for experienced traders. The market remains highly volatile, and traders should approach it with caution.
Analyst comment
Neutral news. As an analyst, it is expected that the market will experience increased volatility and uncertainty in the near term as a result of the significant price drop and liquidations. Traders should exercise caution and closely monitor market conditions.
