Bitcoin liquidations, leverage levels show capital being actively used in
price discovery as shorts take hard hit Bitcoin experienced roller-coaster
price action around the US market open last week, liquidating much of leveraged
positions.
Chart from CoinGlass showing cumulative liquidations and time of trading on
March 5th & 8th around US market open (2.30 pm GMT):Graph via Coinglass
This was met with an approximately 2% move up, followed by a >10% down-move
on March 5th that insta-swept the book and rinsed all leverage to $60k.
More recently, the rapid V-shaped recovery that followed generated even more
leverage at around $70,000 and later a floor of support for liquidation events
near $66,000. These were shaken out from the market open on March 8, and there
was very little left leaning over above $66,000.
The March 11 move to $67,000 and subsequent return near all-time highs has
also once more wiped out the vast majority of leveraged traders above $66k -
providing a good base. What this disenchantment does, however, is give Bitcoin
de facto clearing above $66,000 - a chance to wrangle when faced with nature.
This is the opposite of what was seen during much of the 2021 bull market,
where leverage amplification played a far larger role: it seems as if this
cycle has worked out that unnecessary debt before its had the chance to inflict
serious volatility. Additionally, large traders and key institutional players
could be paving the way for Bitcoin price discovery by clearing any blockage on
a grand scale.
How Market Makers Plays A Role In Price Discovery:
Market makers, and in more recent years ETF-authorized participants are the
primary manipulators of financial markets – directing flows to match incoming
buy/sell orders directly into providing liquidity at either side of whatever
asset’s market. In order to make a profit from the spread, they quote
continuous bid and ask prices; however their function is far more than just
earning money.
Sweeping the Order Book — Market makers that occurs in particularly violent
times of price action! This includes entering a large number of orders at
different price levels in order to test the depth of the market and find out
where demand meets supply. This overview provides both a survey of the current
state of supply and demand in the marketplace as well as serves to act like price
discovery mechanism — where market participants are willing to transact
meaningful volumes at certain level or area.
With all the leverage sucked out of Bitcoin in a recent series of sweeps, it
left market conditions remaining demonstrative and primed for price discovery.
The elimination of leveraged sell orders has significantly alleviated the
downward pressure on the market, as a more organic price discovery process
takes place. In this difference exists a market less dictated by the megaphone
bets of leveraged traders and more driven by its constituent's true sentiment
and convictions.
This allowed the market to settle in a new balanced state free from
leveraged pressure, meaning that Bitcoin is more likely priced according to its
real market value. That does not mean it will be a straight and narrow road by
any means - there are going to be twists and turns with the volatility in
crypto we all know. But the prevailing picture indicates that circumstances are
aligned for an extension of a more durable upward path.
Since December, leverage has been reduced and order book swept:
During the coming market forces of December 2022 through to March of 2023, a
closer examination details our roadmap for greater price discovery and another
floor based at $50,000.
In December, the market saw significant liquidations of leveraged positions
as longs were wiped out just over $41,000 and a large-scale slaughter on shorts
around the $45k level. In the lead-up to January 11 and the ETF decision,
Bitcoin saw a lot of activity as shorts stacked around $45K which were carried
through post-decision day but did not break even until BTC price came down
towards $40K. This price was held up relatively strong and very little in the
way of long interest, hinting that it is more based on holders keeping their
positions along with general DP support than any leveraged futures or options
churn this round.
A small number of shorts were liquidated on the way up as Bitcoin recovered
from $40,000 to push toward $45,000 in day one or two of February. Bitcoin from
40,000 to $50,000 was seeing longs built into the market. When Bitcoin hit
$50K, it had built some serious pressure with around $27B in leveraged
positions. Nevertheless, the move to $50,000 saw significant depletion of
leverage positions at that price point.
In early March, the beginning of that month saw Bitcoin rise to $70,000 and
then fall by over a complete candlestick all the way down to just shy of
$59,000 entirely liquidating most major leveraged positions in both directions.
There was some leverage at $70, but nearly all newly-minted leveraged positions
are concentrated below $50.
The closure of leveraged positions have cleaned up the market and provided a
healthier long/short distribution across ranks. A potentially more organic
price discovery process driven by actual market demand instead of leveraged
speculation could be the catalyst.
Recent liquidations and a scaling-back in leveraged positions across the
Bitcoin market signal that capital may be prevailing towards more of an
exercise in price discovery, rather than one driven by taste. With longs
cleared off the books and liquidated for 50% of their value, we see a scenario
where leverage has been mostly exhausted within such an aggressive sell-off,
which will allow some natural buy-side demand & price appreciation to begin
gaining ground.
The removal of excess leverage has paved the way for a more broadly-driven
market dynamic, where price discovery is influenced by positive fundamental
factors such as rising mainstream adoption, regulatory clarity and advancements
in blockchain technology.
Current liquidations and leverage data highlight the organic price discovery
counter-trend case.ExecuteScalar
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