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.
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.
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.
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.”
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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