Retailers become “sitting ducks” as the sell-off triggers a $ 1.4 billion liquidation


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After flirting with a $ 2 trillion market cap for the past few days, the cryptocurrency market took a 7% hit on April 7, bringing the total cryptocurrency market cap down to $ 1.8 trillion. When the unexpected sell-off took place, investors looked for a reason to explain the move.

Analysts usually identify excessive leverage as a prime suspect, as it usually happens when the market hits an all-time high and traders get greedy. However, this is an easy conclusion to reach.

The actual cause could be nearly impossible to determine. A starting point, however, is how much leverage the buyers have compared to the previous weeks. Analysts also have to wonder whether a $ 1 billion liquidation even matters in the current bullish environment.

The leverage increases price movements on both sides

Total capitalization of the cryptocurrency. Source: TradingView

The negative price swing on April 7th is similar to the rally that had taken place two days earlier. However, retailers leverage by using perpetual futures contracts (inverse swaps), which can amplify price corrections.

A step of 5% is enough to liquidate traders with 20x leverage and the order books for exchanges tend to thin below this level as traders rarely have orders.

ADA) USDT order book. Source: Binance

As shown above, in the example above, Cardanos ADA has bids ranging from $ 4.6M up to $ 1.15. Beyond the 5% threshold, it’s just $ 1.9 million to $ 1.06, or 12% below the last trade.

Thin order books are a gold mine for scalpers and arbitrage desks. Once the retail markets take heavily indebted positions, there are several incentives to push the price down and trigger liquidations.

Total liquidations. Source: Bybt

Today’s $ 1.4 billion 12-hour liquidation may seem excessive, but that aggregates all of the futures markets. In addition, this represents only 3% of the total of USD 46 billion in open positions. If that move had happened about six months ago, the number would have been north of 12%.

However, assuming liquidations triggered the decline is not the best answer as these are only triggered when the markets are falling 4% or more. While analysts may never fully understand what caused the correction, a “buy the rumor, sell the news” event could have occurred after Coinbase released its quarterly results.

The funding rate is high, but not unusual

It is also important to check what the funding rate has been and, more importantly, how long it has been. Even if the eight hour fee hits 0.20%, which is 4.3% per week, longs are not forced to close positions.

BTC Perpetual Futures 8-hour financing rate. Source: Coinalyze

As shown above, the average funding rate on the top exchanges didn’t rise above 0.10%, which is well below its late February level.

During rallies it is natural for long traders to take overly leveraged positions and this situation can last a few hours to weeks.

Sometimes retailers turn into sitting ducks

Whales and market makers probably knew that the market order books were thin and that retailers were overly leveraged. Hence, today’s price action cannot be dismissed as a deliberate maneuver.

However, the arbitrage between exchanges and futures markets occurs almost instantaneously, so that no trace is left. Analysts and experts may cite numerous reasons for moving today, but the available data suggests that the leverage itself is not to blame.

The views and opinions expressed here are solely those of author and do not necessarily reflect the views of Cointelegraph. Every investment and trading step is associated with risks. You should do your own research when making a decision.