On August 8th on January 19th, the total crypto market capitalization fell by 9.1%. but, more importantly, he took advantage of the all-important psychological support of $1 billion. the market last ventured below this just three weeks ago, meaning investors were pretty sure the $780bn total market cap trough on June 18 was merely a distant memory.
Regulatory uncertainty increased on August 1. 17 after the US House Committee on Energy and Commerce announced they were “deeply concerned” that trial-of-work mining could increase demand for fossil fuels. as a result, usa legislators asked crypto mining companies to provide information on energy consumption and average costs.
Reading: Bitcoin coordinated sell off
Typically, sell-offs have a bigger impact on cryptocurrencies outside of the top five assets by market cap, but the August 1 correction. 20 had losses ranging from 7% to 14% overall. bitcoin (btc) saw a 9.7% loss testing $21,260, while ether (eth) saw a 10.6% drop to its intraday low of $1,675.
Some analysts might suggest harsh daily corrections like the one seen on August 1st. 20 are a norm rather than an exception, considering the annualized volatility of 67% of assets. case in point, Aug. The Jan 20 intraday drop in total market capitalization exceeded 9% in 19 days over the last 365, but some aggravation is causing this current correction to stand out.
btc futures premium disappeared
Fixed-month futures contracts typically trade at a slight premium compared to regular spot markets because sellers demand more money to hold settlement longer. Technically known as “contango”, this situation is not exclusive to crypto assets.
In healthy markets, futures should trade at an annualized premium of 4% to 8%, which is enough to offset the risks plus the cost of capital.
According to the OKX and Deribit Bitcoin futures premium, the 9.7% negative swing on BTC caused investors to eliminate any optimism using derivatives instruments. When the indicator flips to the negative area, trading in “backwardation,” it typically means there is much higher demand from leveraged shorts, which are betting on the further downside.
leverage buyer liquidations exceeded $470 million
futures contracts are an easy and relatively low cost instrument that allows the use of leverage. the danger of using them lies in liquidation, which means that the investor’s margin deposit becomes insufficient to cover their positions. in these cases, the exchange’s automatic deleveraging mechanism kicks in and sells the crypto used as collateral to reduce exposure.
A trader might increase their gains by 10x using leverage, but if the asset drops 9% from their entry point, the position is terminated. The derivatives exchange will proceed to sell the collateral, creating a negative loop known as a cascading liquidation. As depicted above, the Aug. 19 sell-off presented the highest number of buyers being forced into selling since June 12.
margin traders were overly optimistic and destroyed
See also: Bitcoin Misery Index ( BMI ) – FSInsight
Margin trading allows investors to borrow cryptocurrencies to leverage their trading position and potentially increase their returns. As an example, a trader could buy Bitcoin by borrowing Tether (USDT), thereby increasing their crypto exposure. on the other hand, the bitcoin loan can only be used to shorten it.
Unlike futures contracts, the balance between long and short spreads does not necessarily coincide. when the margin loan ratio is high, it indicates that the market is bullish; the opposite, a low index, indicates that the market is bearish.
Crypto traders are known for being bullish, which is understandable considering the adoption potential and fast-growing use cases like decentralized finance (DeFi) and the perception that certain cryptocurrencies provide protection against USD inflation. A margin lending rate of 17x higher favors stablecoins is not normal and indicates excessive confidence from leverage buyers.
These three derivatives metrics show that traders definitely did not expect the entire crypto market to correct as sharply as today, nor for the total market capitalization to retest the $1 trillion support. this renewed loss of confidence could cause the bulls to further reduce their leverage positions and possibly trigger new lows in the coming weeks.
The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. you should do your own research when making a decision.