Bitcoin’s 5% plunge triggers $500m in liquidations

Crypto prices dropped sharply on Wednesday, triggering more than $500 million in liquidations within hours, according to CoinGlass data.

Funding rates had been high in options markets over the past few days, suggesting the market had become overstretched.

Wipe out

Bitcoin’s price slipped below $43,000 having briefly reached a 21-month high on Tuesday. More than $110 million Bitcoin long positions were liquidated.

The drop in prices was likely due to overheating in the crypto market, which has been red hot in anticipation of regulatory approval of a Bitcoin exchange-traded fund.

Funding rates and basis had been suggesting that leverage was getting a bit overstretched, Noelle Acheson, author of the Crypto is Macro Now newsletter and former head of research at Genesis, told DL News.

Basis refers to the spread, or difference, between the spot price of an asset and its futures price. Bitcoin’s basis on the CME has been as high as 20% over the past week.

Funding rates are the mechanism used to ensure that perpetual contracts — which have no expiration date and trade in perpetuity — track spot prices.

In essence funding rates involve investors holding long positions paying those with short positions, or vice versa. Depending on whether the rate is positive or negative, one side will pay the other to maintain their positions. This ensures the contracts track the spot price closely and there isn’t a wide gap — or basis.

Positive funding rates are a bullish signal as they show intent from long traders — who are willing to pay short traders to maintain their position.

Funding rates were steadily above 0.11% over the past few days, but have come back down to around 0.09% following the sell-off. These rates similarly dipped at the beginning of December when prices rose sharply, leading to a deleveraging event.

A post from crypto platform Matrixport this morning suggested that the SEC is likely to reject the current batch of spot Bitcoin exchange-traded fund applications. This could have triggered some traders unwinding their positions, which led to further unwinds, Acheson told DL News.

However, “it doesn’t feel convincing enough for a fundamental position shift,” she wrote in her newsletter on Wednesday.

“Plus, if this were mainly an ETF-driven correction, we’d probably see BTC drop faster than other crypto assets. We’re not seeing that,” Acheson said.

Crypto market movers

• Bitcoin traded around $42,455, down 5.5% since Wednesday.
• Ethereum dropped 6% to trade just above $2,200.

What we’re reading

• Hackers raided crypto for $1.7bn in 2023 — check out the top 10 heists of the year — DL News
• From BlackRock to Apollo: Meet 15 finance executives shaping the future of crypto — DL News
• Radiant Capital Pauses Arbitrum Market After $4.5M Flash Loan Attack — Milk Road
• Crypto Voters Emerge As 2024 Election Wild Card: Report — Milk Road

Adam Morgan McCarthy is DL News’ London-based Markets Correspondent. Got a tip? Reach out at adam@dlnews.com.