Bitcoin fell by $10,000 in a matter of minutes last weekend — dragging down the rest of the crypto markets with it.
Why did this happen, and what does it mean for the bull run?
Blockware's lead insights analyst, Will Clemente, describes a perfect storm of "low liquidity" and high levels of open interest in the futures market. As prices fell, a "cascading effect" led to billions of dollars in BTC long positions being liquidated — creating carnage for traders. Explaining how leverage works, he said:
"If I'm 10x long, that means the price only has to go down 10% and I'm out. If I'm 20x long, the price only has to go down 5% and I'm liquidated … One person gets liquidated, then that puts a forced sell onto the book that pushes prices further down … It has this kind of snowball effect of this person triggering the next person's stop loss or liquidation, which triggers the next guy and the next guy."
He explained that many of the people who ended up losing money using leverage were everyday investors.
Will believes that $53,000 is a crucial level for Bitcoin to reclaim — and beyond that, $60,000 for confirmation of bullish momentum. However, he doesn't believe that the loss of BTC's $1 trillion is too big of a setback:
"The type of market participant we have now, they're much more patient. And they're much less emotional. Now we have institutions … these guys aren't gonna chase the price up. They'll wait for prices to come back to them."
He also thinks there's a "reasonable chance" that funds will be willing to take on new risk in the first quarter of 2021 — but that could depend on "extraneous macro factors" such as the Federal Reserve increasing interest rates, or developments relating to the Omicron coronavirus variant.