Data show that crypto futures liquidations reached $238 million in the last 24 hours as bitcoin observed a 10% gain.
Bitcoin Liquidations Reach $238 Million
Whenever an investor opens a futures contract on a derivatives exchange, he or she must first present an initial collateral called margin. Such contracts may be liquidated if the holder accumulates losses eating up a certain portion of this margin.
“Liquidation” here means that the derivatives exchange will force the contract to close when this particular degree of loss has been accumulated (exact percentage may vary by platform) .
One factor that increases the risk of a contract being liquidated is ‘leverage’. Leverage is the loan amount that the owner can choose against their margin and is usually equal to many times the initial position itself.
The advantage of leverage is that investors get more profit. Conversely, however, the loss suffered by the holder also increases by the same factor as the leverage.
Mass liquidation events are not an uncommon sight in the crypto market. There are two main reasons for this. The first is that the general volatility of an asset like Bitcoin can be very high.
Another is that many platforms typically allow leverage as high as 50x or even 100x the initial collateral. These two factors combine to make ill-informed trading with high leverage potentially deadly in this market.
Well, here is data on liquidations that have occurred in the cryptocurrency futures market over the past 24 hours.
Looks like a pretty high amount of liquidations have taken place today | Source: CoinGlass
As noted above, a total of $238 million in cryptocurrency futures contracts were liquidated in the past day. Of these, about $111 million occurred in the last 12 hours alone.
About 80% of this futures flash involved short contracts. This is a trend that makes sense as this mass liquidation event was triggered by a sharp rise in the price of an asset like Bitcoin.
A mass liquidation event is commonly referred to as a “squeeze”. This was an example of a “short squeeze” as most recent leveraged flushes contained short contracts. A unique feature of squeezes is that liquidations can cascade during the squeeze.
This is because a large number of liquidations at once will further amplify the price volatility that caused them. This extended price move will trigger even more liquidations in the market. So during the squeeze, the liquidations cascade together.
Bitcoin is trading around $22,000 at the time of writing, down 1% over the past week.
The crypto seems to have shot up during the past day | Source: BTCUSD on TradingView
Pierre Borthiry – Peiobty featured image on Unsplash.com, chart on TradingView.com