Mass crypto futures liquidation as bitcoin drops below $34K

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The cryptocurrency market has seen over $500 million of liquidated positions in the last 24 hours as Bitcoin slipped below $34,000.

Approximately $500 million worth of cryptocurrency futures positions have been liquidated in the last 24 hours. The mass liquidation of positions occurred before the price of Bitcoin (BTC) was lower than $34,000 on Jan. 17.

 

Bitcoin total liquidations. Source: Bybt.com

Why were so many positions liquidated?

Overnight, the price of Bitcoin rose by 6.7 percent from $35,500 to almost $38,000. Meanwhile, the rate of future financing increased sharply, indicating an over-extended market.

Across major exchanges, the financing rate of the Bitcoin perpetual swap futures contract rose to around 0.07 percent.

Considering that the average funding rate is typically around 0.01%, the futures market has been overcrowded up to $38,000.

As such, the price of Bitcoin began to fall when several large orders for sale hit the market at just over $38,000. The overheated futures market has further stepped up the correction.

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Overall, $500 million in liquidation is not a large figure compared to the past week, for example, when Bitcoin saw $1 billion in futures contracts liquidated on peak days.

Is the Bitcoin bottom near?

But the drop has not led the futures market’s open interest to decline, causing concerns for a bigger pullback. There are still a large number of traders betting on Bitcoin in the futures market, which opens up the possibility of another long squeeze.

A pseudonymous trader is known as “Salsa Tekila” said that if Bitcoin falls below $30,000, it would enter “bear market territory.” Hence, in the near term, it is crucial for BTC to maintain $30,000 as a macro support area. He said:

“If we go below 30k it’s bear market territory. We’d have enough underwater bagholders to keep us down for a long while. Until then, could go either way I reckon. If reclaim and hold above 40k, I think 50-60k vicinity plausible. Me thinking $BTC is topped is a bias, not a trade.”

In addition, according to CryptoQuant CEO Ki Young Ju, the open interest in the futures market is still rising. In the past few days, the on-chain signals indicating the purchaser’s demand have stagnated.

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Based on the combination of the overcrowded derivatives market and the lack of purchase signals, Ki wrote that the market was uncertain and that it could retest $30,000 again. He wrote:

“People trade $BTC with low leverage, open interest is skyrocketing, and the long-short ratio looks neutral. Strong on-chain buying signals that have driven this bull market hasn’t come up so far. $BTC might retest 30k, so I don’t have any position now in this uncertain market.”

Bitcoin estimated leverage on exchanges. Source: CryptoQuant

As reported earlier, binance traders, the largest open-interest futures exchange, have started to use lower leverage over the past week. This is indicative of an increased level of market fear and lack of certainty about BTC’s short-term price trend.

On the other hand, some traders remain optimistic in the medium term, explaining that the current $40,000-level drawback was not only expected but also much-needed for the rally not to overheat.

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