The reason behind the shocking Bitcoin sell-off

Bitcoin’s boom has almost lost momentum, at least for now. The world’s largest digital currency continued to fall sharply yesterday, leaving the $ 50,000 mark and losing more than 20% from a record high of $ 64,829 on April 14.

The moment Bitcoin peaked coincided with Coinbase listing on the Nasdaq. Both of these events marked the culmination of a bull run that stirred the crypto market. The price of Bitcoin more than tripled in 2020 and doubled in early 2021 before plunging.

The bull run began to run out of steam over the weekend, when Bitcoin abruptly dropped 17% to $ 52,149, when half of the decline took place in about 20 minutes. Despite a partial recovery, the negative has stabilized, ending Friday at $ 50,620.

Bitcoin price since plunged last Sunday.

According to Michael Oliver, an expert at research firm Momentum Structural Analysis, Bitcoin’s momentum has recently shown signs of slowing down. Since Bitcoin first crossed the $ 60,000 mark in March, the growth has slowed down and has only been traded in a relatively narrow range. This is a sign that the uptrend could slow down, as it did last weekend, he said.

Continuous decline has emphasized the fragility of recent gains in the world’s largest digital currency. Currently, it is still unclear what factors were behind, triggering this sell-off. According to CoinMarketCap, $ 220 billion of crypto capitalization has been wiped out in just 1 hour.

Some traders attributed the cause to the rumors on Twitter about the US Treasury Department preparing to make a big move with some financial institutions allegedly using cryptocurrencies for money laundering. However, a spokesperson for the agency declined to comment.

Whatever the trigger for the sell-off, traders all agreed that Bitcoin has accelerated thanks to the explosion of a large number of leveraged transactions on foreign crypto derivatives exchanges. . These exchanges are not strictly managed.

In total, investors sold off $ 10.1 billion worth of cryptocurrencies across exchanges, according to data provider Bybt. More than 90% of the positions sold off that day came from a bullish bet on Bitcoin or other cryptocurrencies. Even nearly $ 5 billion of liquidated positions took place on just one exchange, Binance.

When the price of Bitcoin fell, many of the stakes in it were automatically sold out. This creates even more downward pressure on prices and leads to a “vicious cycle” for the next sell-off. As a result, some investors have lost a lot of money without realizing the “warning”.

Jasim – an engineer in Kuwait, shared, he was awakened by the ringing of the phone at 5 am on Sunday. He was nervous to see some traders sell off positions on Binance. Then, Jasim quickly closed the position and suffered a huge loss of $ 9,000.

This was not the first time Jasim had been in such a situation. He has sold the position a few times since entering the crypto market in 2017. “The problem is greed.” Although he suffered losses, he continued to trade, intending to be more careful in risk management.

Exchanges like Binance allow retail investors to deposit relatively small amounts in advance to bet on larger amounts. For example, let’s say some traders buy futures contracts that will receive a profit if the Bitcoin price rises against the USD.

If Bitcoin rises, traders’ profits could be much larger than if they bought Bitcoin. However, if Bitcoin falls, the trader could incur huge losses and have to quickly replenish the account. Otherwise, the exchange will automatically sell off the trader’s hold.

The total value of short / long positions on cryptocurrency derivatives exchanges since the beginning of April.

Another cause of last week’s turmoil was a number of exchanges – including Binance, that said the trading platform was malfunctioning due to the high volume of transactions. Traders said they were unable to access these exchanges and exacerbated volatility.

Meanwhile, overseas crypto derivatives exchanges offer retail investors a high degree of leverage. For example, at Binance, an investor can get 1 to 125x leverage on some futures contracts, meaning that the investor can deposit as little as 80 cents to hold an equivalent of $ 100. Bitcoin. On the CME exchange in the US, investors need a deposit of at least 38 USD and can be required by the brokerage company at a higher rate.

However, traders reported that the pace of sell-off last week was too fast, further emphasizing the role of bets that use large leverage. Many of them are from retail investors.

Other than that, a number of other signs suggest that Bitcoin’s momentum is fading. It’s been institutional investor demand that has steadily weakened and Coinbase has been flat since its IPO last week.

According to crypto exchange OKEx, the large volume of Bitcoin transactions – often performed by professional asset managers, has decreased slightly in the first quarter compared to the fourth quarter of 2020. Furthermore, the research firm CryptoCompare said that assets run by asset managers in the industry fell 4.5% to $ 56 billion in April compared to March.

Refer to the Wall Street Journal