XRP holders couldn’t have asked for a better year as the cryptocurrency gained nearly 800% in the wee hours of April 14, flirting at a $ 2 level.
Not only does this robust price surge hit its highest level since January 2018, it also signals that investors are not concerned about the ongoing dispute over the SEC’s offering of unregistered securities.
However, just 6 hours after soaring to $ 1.96, XRP price plummeted more than 20%. During an interview, Barry Silbert, CEO of DCG Group, said it would be risky for US exchanges and companies to re-list XRP before receiving the SEC’s blessing. Those remarks may have contributed to the unprecedented $ 420 million liquidations on the futures exchanges.
Over the past few weeks, the main catalysts behind the XRP rally have been victories in Ripple’s litigation. Attorneys representing Ripple were given access to internal SEC discussions on cryptocurrencies, and more recently a court denied disclosure of the financial records of two Ripple executives, including CEO Brad Garlinghouse.
Given the recent rally, it will likely be imprecise to identify a single reason for the price correction. Even so, the impressive $ 420 million liquidations after 24 hours beat that of February 1, when XRP price plummeted 46% in two hours.
The only logical reason for this volatile liquidation is excessive leverage by buyers. To confirm such a thesis, one has to analyze the funding rate for open-ended contracts. To offset their risks, the exchanges charge either longs or shorts depending on how much leverage each side requires.
The graph above shows that the 8-hour funding rate exceeds 0.25%, which is 5.4% per week. While this is an exaggeration, buyers will withstand these fees in the event of sharp price rallies. For example, the current move up lasted almost three weeks, and before that there was another one in early February.
It seems a bit extreme to attribute the liquidations solely to leverage, although that certainly helped fuel today’s correction.
In addition, the record growth in open positions in XRP futures was accompanied by an increase in the volume on the spot exchanges. As a result, the possible effects of larger liquidations should have been absorbed by the increased liquidity.
Cascading liquidations always take place in volatile markets. Investors should therefore focus on how long it will take for the price to recover.
In principle, a decline of 10% or 20% over the course of the day should not be interpreted differently. The correction depends on how many bids were previously stacked in stock market orders and is not directly related to investor bullish or bearish sentiment.
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