Friday morning came and went without a decision in the ongoing lawsuit filed by Grayscale Investments against the Securities and Exchange Commission. A ruling in the case about plans for a spot bitcoin ETF had been widely expected by some, and a flash crash last night in crypto markets occurred amid all the jitters in anticipation.
The ongoing lawsuit and the elusive decision
Investors and crypto enthusiasts eagerly awaited a decision in the ongoing lawsuit filed by Grayscale Investments against the Securities and Exchange Commission (SEC). The lawsuit pertains to Grayscale’s plans for a spot bitcoin exchange-traded fund (ETF). Friday morning passed without any definitive ruling, leaving the crypto community in suspense.
Flash crash and over $1 billion in liquidations
As anticipation grew and uncertainty loomed over the lawsuit’s decision, the crypto market experienced a flash crash. Over $1 billion in leveraged positions were liquidated in a mere 24 hours, sending shockwaves through the market. Long positions were wiped out, causing bitcoin’s price to plummet below $26,000 for the first time in two months.
Bitcoin’s price volatility resurfaces
Bitcoin’s price had been relatively stable in recent weeks, but the flash crash reignited volatility in the market. The price of bitcoin fluctuated throughout the day on Friday, experiencing a 6.6% decline to reach $26,033 at 2:35 p.m. ET. Data from The Block confirmed a significant spike in price fluctuations, with the hourly bitcoin volatility for the past 24 hours reaching 96.6%. This marked a substantial increase from the 29.52% annualized volatility recorded over the last month.
Analysts scramble for explanations
Financial experts and analysts scrambled to provide explanations for the sudden market turmoil. Some pointed to a Wall Street Journal report suggesting that SpaceX had sold its bitcoin holdings at a loss of $373 million. Others blamed the Federal Reserve after hawkish signals emerged from the Wednesday FOMC (Federal Open Market Committee) minutes. Additionally, concerns arose over the bankruptcy protection filing by Chinese property developer China Evergrande in the U.S., sparking fears of a broader crisis.
However, K33 Research, a market analysis firm, argued that these narratives failed to fully explain the timing and severity of the market drop. According to K33, the sharp decline was primarily driven by the unwinding of leverage in derivatives markets, resulting in rapid feedback loops.
Could the drop lead to a short squeeze?
The liquidation of 50,000 BTC (worth approximately $1.3 billion) in open interest wiped out a significant portion of derivatives market exposure within hours. K33 Research suggested that these events could lay the groundwork for a potential short squeeze. Increased shorting and the elimination of long positions may create conditions conducive to a short squeeze, where a rapid price increase occurs due to the forced closure of short positions.
In agreement with K33’s analysis, Lucas Kiely, the chief investment officer of Yield App, stated that the recovery initiated by bitcoin and ether following the flash crash indicated that the sharp tumbles were primarily liquidation events. However, Kiely acknowledged that investor sentiment extended beyond the crypto realm, with concerns over China’s real estate crisis and rising U.S. bond yields impacting bitcoin sentiment.
The elusive decision in the Grayscale lawsuit, paired with the subsequent flash crash and over $1 billion in liquidations, is a reminder of the inherent volatility of the cryptocurrency market. While financial analysts strive to attribute the market turbulence to specific events, the complexity of factors influencing investor sentiment cannot be easily deciphered. As the crypto industry continues to mature, market participants must navigate these moments of uncertainty and volatility.
Analyst comment
Negative news: The ongoing lawsuit and the flash crash have created uncertainty and volatility in the cryptocurrency market, leading to over $1 billion in liquidations and a sharp decline in Bitcoin’s price. Financial analysts are struggling to explain the timing and severity of the market drop. There is a possibility of a short squeeze due to the liquidation of open interest. Despite the recovery, concerns over China’s real estate crisis and rising U.S. bond yields continue to impact investor sentiment. The market is reminded of the inherent volatility of cryptocurrencies.
