Cryptocurrency market cap fell 9.1% on Friday, August 19th, but more importantly, the all-important $1 trillion sentiment support was tapped. That the market fell below this just three weeks ago suggests investors were pretty confident his June 18th low for his $780 billion market cap was just a distant memory. I mean
Regulatory uncertainty increased Aug. 17 after US House of Representatives Commission on Energy and Commerce announced that it is “deeply concerned” that proof-of-work mining could increase demand for fossil fuels. As a result, US lawmakers have asked cryptocurrency mining companies to provide information on their energy consumption and average costs.
Normally, a sale would have a bigger impact on non-cryptocurrencies than the top five assets by market capitalization, but today’s correction showed losses ranging from 7% to 14% across the board. Bitcoin (Bitcoin) is $21,260 and Ether (ethereum) fell 10.6% to an intraday low of $1,675.
Some analysts might suggest that the harsh daily corrections we see today are the norm rather than the exception, given the asset’s annual volatility of 67%. Case in point, today’s intraday decline in total market capitalization has exceeded 9% in 19 days over the past 365 years, but some adverse factors make this current correction stand out.
BTC Futures Premium Disappeared
Fixed-month futures contracts typically trade at a slight premium over the regular spot market. This situation, technically known as “contango,” is not unique to cryptocurrencies.
In a healthy market, futures should trade at an annualized premium of 4% to 8%, which is sufficient to offset risk and cost of capital.
Bitcoin futures premiums on OKX and Deribit show BTC’s 9.7% negative swing has driven investors out of optimism using derivatives products. When the indicator flips into negative territory and trades in “backwardation,” it usually means much higher demand from leveraged shorts betting on further declines.
Leveraged Buyer Liquidations Exceeded $470 Million
Futures contracts are a relatively low-cost and easy way to take advantage of leverage. The danger of using them is in liquidation, meaning investors’ margin deposits become insufficient to cover their positions. In such cases, the exchange’s automatic deleveraging mechanism kicks in and sells the crypto used as collateral to reduce the exposure.
Traders can use leverage to multiply their profits by 10x, but if the asset falls 9% from the entry point, the position will end. Derivatives exchanges proceed to sell collateral, creating a negative loop known as cascading liquidations. As shown above, August 19’s selling marked the highest number of buyers forced to sell since June 12th.
Margin traders were overly bullish and destroyed
Margin trading allows investors to borrow cryptocurrencies to leverage their trading positions and potentially generate income. As an example, a trader can borrow a tether to buy bitcoin (USDT), thus increasing crypto exposure. Bitcoin borrowing, on the other hand, can only be used for shorts.
Unlike futures contracts, the balance between long and short margins is not necessarily the same. A high margin lending ratio indicates that the market is bullish. Conversely, a low ratio indicates a bearish market.
Crypto traders are known to be bullish, but this is due to the potential for adoption and rapidly growing use cases such as decentralized finance (DeFi), and the fact that certain cryptocurrencies offer protection against US dollar inflation. It is understandable considering the perception of providing.margin Lending interest The 17x higher stablecoin favor is not normal and indicates excessive trust from leveraged buyers.
These three derivatives indicators show that traders did not expect the entire crypto market to correct as sharply as it did today, or for the market cap to retest the $1 trillion support. increase. This new loss of confidence could cause the bulls to further tighten their leverage positions, triggering new lows in the coming weeks.
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