Bitcoin’s Brief New All-Time High Sparks Bull Market’s First Liquidation Cascade
Each day, Coinrule will run through the state of the digital assets market for Blockbeat, your home for news, analysis, opinion and commentary on blockchain and digital assets
Tuesday evening reminded us of the savage volatility that makes crypto both feared and loved. A rejection from just above the previous $69,000 all-time high caused the market to momentarily go into a liquidation tailspin before finding its feet and marching back up.
In crypto, bull markets frequently experience fast and deep drops that they quickly recover from. Encountering areas of significant selling triggers these drops, causing prices to decline rapidly. The previous all-time high was one of these areas. This wouldn’t be an issue with just spot trading, but slight price drops force all highly leveraged bets to close because they lack enough collateral to cover the declining value of their positions. This triggers more selling and more forced closures. Known as a “liquidation cascade,” we witnessed Tuesday’s first significant instance of this in the current bull market. The outcome was removing over $3 billion in open interest on Bitcoin alone, marking the largest liquidation event in the past six months.
This “cleansing” process is necessary to sustain longer-term price moves as it resets the funding rates. Futures markets, where leverage can be applied, use funding rates to incentivise either going long or short. This ensures the futures price of an asset matches the spot index price. The funding rate before the reset was around 100% APR on all assets. In the hours following the major drop, the rate was back down to around 20% APR. Lower funding makes shorting less profitable and therefore attractive. However, higher funding rates will likely continue. Traders will continue longing BTC, and others, as they push for new all-time highs and beyond.
In previous cycles, a certain confidence accompanied price corrections due to the necessary resets of funding rates. However, this cycle, the seemingly never-ending spot demand from the ETFs has provided another layer of bullish comfort. On Tuesday, IBIT saw $788 million inflows – a new record. Total net inflows for the ETFs stood at $648 million, their third highest. Volume for the ETFs also passed $10 billion with traders making the most of the volatility. It is therefore no surprise that the price drop was quickly re-filled. We are still firmly in Bull market territory.
Read more here