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– TIMESTAMPS –
2:11 Leverage Overview
4:55 Leverage Side Effects
8:58 Liquidations on Market
10:41 March 2020 Crash
13:59 May 2021 Crash
17:00 Changes Coming?
⛓️ 🔗 Useful Links 🔗 ⛓️
Carnegie Melon Paper:
Coinmetrics Blog Post:
Bitcoin Liquidatoin Crash:
Autopsy on Liquidations:
🤔 What is Leveraged Trading 🤔
Leverage is when you increase your exposure to the crypto market through borrowed money. There are a number of different instruments that could allow you to leverage your position. The most basic of these is through margin trading
However, the most well known leveraged instruments for crypto traders are futures. And no, these are not the same futures instruments that you see in traditional finance. Not the kind of Bitcoin futures instruments listed on the CME.
💧 Liquidation Process 💧
When trading with leverage you need a maintence margin that will serve as collateral. In the event that the margin is insufficient to cover the position, then it is automatically closed on the exchange through a process called ‘liquidation’
These liquidations often happen so quickly and the larger the leverage, the more liquidations. Each of these exchanges have their own liquidation engines that make sure that they keep the exchange solvent through this process.
There is also considerable evidence that those with the smaller accounts are more likely to get liquidated. Those that are long are more likely to get liquidated. This was all according to a study by researchers at Carnegie Mellon university.
❌ Impact on Market 2020 ❌
During the crash of 2020 inspired by the pandemic, there is considerable evidence that it was precipitated by a large degree of leverage in the system.
Many thought that this was caused by a BitMEX liquidation spiral. As the exchange was liquidating these positions, it led to more positions being liquidated which further drove down the price. There was a risk that they almost drained the liquidity on the order books.
This led to a crash of Bitcoin down to $3,900. It was only once the BitMEX liquidations stopped did we see a recovery in the price.
❌ Impact on Market 2021 ❌
Bitcoin futures reached peak open interest on the 16th of April at over $9 billion. ETH reached an All time high open interest of over $3.3 billion on the 10th of May.
Then came the China news and all the FUD headlines in response. FUD shook the weak hands and this of course led to the initial liquidations.
From peak to trough, we were down over 50%. From a high of $64k in April down to a low of $31k May. This was caused by a great deal of liquidations cascading across all the different exchanges.
These liquidations led to a further crash which precipitated further liquidations. On a single day, we had over $9bn in contracts liquidated – the most ever.
Once this cleared out the system, the price started to recover.
🤔 Potential Changes 🤔
Regulators are getting increasingly active as they start to target leverage exchanges. They brought down the BitMEX founders at the end of last year and they could be targeting other exchanges.
In order to preempt this, these exchanges decided that they were going to limit leverage and impose mandatory KYC on their users. This could have the impact of reducing the amount of leverage in the system.
However, it depends on whether some of these other exchanges are likely to follow suit and restrict that trading.
📜 Disclaimer 📜
The information contained herein is for informational purposes only. Nothing herein shall be construed to be financial legal or tax advice. The content of this video is solely the opinions of the speaker who is not a licensed financial advisor or registered investment advisor. Trading Forex, cryptocurrencies and CFDs poses considerable risk of loss. The speaker does not guarantee any particular outcome.
#Bitcoin #BTC #Trading #Volatility #Leverage #crypto
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