Leverage Trades are Driving the Wild Swings in Cryptocurrencies
When you start to dig Bitcoin’s aggressive moves are being driven by much more than the next China crackdown or Elon Musk headlines. Leverage could be a cause of the recent volatility as many traders are using 100 to 1 leverage for some trades.
Traders taking excessive risk in the unregulated cryptocurrency market are being forced to sell when prices go down were in large part responsible for last week’s 30% drop. This triggers outages for major exchanges and panic that snowball and accelerate moves.
When traders use margin, they essentially borrow from their brokerage firm to take a bigger position in bitcoin. This is a fairly common practice in traditional asset markets and companies like Robinhood have made it even easier to get access to margin. So when trading on margin if prices go down, they have to pay the brokerage firm back when the losses start to mount in what’s known as a margin call. As part of that, there’s often a set price that triggers selling in order to make sure traders can pay the exchange back and institutional investors and whales in cyryptomarkets know this and take advantage of the opportunities it presents. Last week they did by tanking prices, with bitcoin losing roughly a third of its value in a matter of hours. Bitcoin popped to nearly $40,000 on Monday but is still down about 33% from its high.
Bitcoin traders liquidated roughly $12 billion in levered positions last week as the price of the cryptocurrency spiraled, according to bybt.com. This mass exodus wiped out about 800,000 crypto accounts. source
It just show selling will bring more selling unit the system come to an equilibrium and at this point I think we are there. I think crypto is the future so I used the dip to add to my ALGO and MATIC positions. Sadly I'm a bit light on fiat to add to too much more at this point...
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