After several days on the way to market stabilization, prices for cryptocurrencies are back in the red.
The negative move seems to have affected altcoins the most. At the time of going to press, all of the altcoins in CoinMarketCap’s list of the largest cryptocurrencies by market capitalization were down around percent. ETH was down almost 11 percent, while Binance Coin (BNB) and Cardano (ADA) were down around 12 percent. Dogecoin (DOGE) fell around 9 percent; XRP fell 13 percent, and PolkatDot (DOT) and Internet Computer (ICP) both fell 9.5 percent.
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The loss of Bitcoin (BTC) was a little less severe. BTC is down 8 percent in the past 24 hours. While the decline pales in comparison to the price drops we saw in Bitcoin markets last week, it has significantly dampened the strides Bitcoin has made over the past week on its recovery path.
By the end of the week, BTC’s next steps could make a big difference in its future. Earlier this week, crypto market analyst TraderKoz said if BTC can hold the $ 37,000 support line over the weekend, it will increase its chances of regaining the $ 42,000 resistance level. However, that recent drop has brought BTC to around $ 36,000, and the 24-hour trend doesn’t look overly optimistic.
This recent drop in prices in BTC markets seems to suggest that Bitcoin could enter a bear market. While many cryptoanalysts are optimistic about Bitcoin’s long-term performance, this decline could be an indication that Bitcoin still needs to make some corrections before it can build enough meaningful support for another rally.
What is causing this prolonged bitcoin slump?
Is Margin Trading the Real Reason behind Bitcoin’s Market Volatility?
While the main story about why the crypto markets have fallen in recent weeks has centered on negative news from the Chinese government, as well as the announcement that Tesla would no longer accept Bitcoin payments. However, there is a third factor that is not quite as visible.
In fact, Elon Musk and the Chinese government certainly have some leverage over the price of Bitcoin. However, many analysts believe that the real driver behind last week’s crash was leverage.
CNBC reported, “Traders who take undue risk in unregulated cryptocurrency markets” had to sell when prices began to fall. What was possibly a minor correction in Bitcoin price resulted in a price drop of around 30 percent.
How does leverage trading or margin trading work? Essentially, traders borrow cash from an exchange or brokerage firm, which allows them to take a larger position in Bitcoin than their holdings would normally allow. When BTC prices suddenly drop, traders have to pay back the brokerage fees. This is known as a “margin call”. Before traders get to this point, there are sometimes a number of sales triggers in place to ensure that traders can repay their debts.
Margin trading doesn’t just apply to Bitcoin or cryptocurrency in general. it can be practiced across all capital markets. However, what is unique about Bitcoin and cryptocurrency is the fact that margin trading is so unregulated.
You mean having no circuit breakers and having people blown up with 50x leverage is a good thing?
As if market participants should actually be responsible for their actions when they make bad decisions …
Yes! Welcome to #Bitcoin, where we actually embrace these things.
– Preston Pysh (@PrestonPysh) May 25, 2021
For example, CNBC quoted Brian Kelly, CEO of BKCM, who pointed out that some cryptocurrency exchanges allow their users to take extreme risks. For example, BitMEX allows each of its users leverage of up to 100 to 1 for cryptocurrency trades. In contrast, Robinhood does not allow its users to use margins on cryptocurrency trades at all. Only professional traders have access to leveraged trading on Coinbase.
The margin trading crowd factor
These exchanges not only allow an extremely high risk, the automatic sell-off triggers that are available with some brokers trigger a kind of “domino effect” that leads to massive liquidations.
Brian Kelly told CNBC that this “crowd factor” can make market movements even stronger. “Everyone’s liquidation price is usually close to everyone else’s price. When you get there, all these automatic sell orders come in and the price just goes down,” he said.
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Devin Ryan, an analyst at JMP, told CNBC, “Selling makes more selling until you strike a balance in leverage in the system.” As the price falls, fewer and fewer traders can meet the margin requirements.
“Leverage in the crypto markets – especially in retail – has been a big issue adding to volatility,” added Ryan.
For example, BTC’s price cuts last week eventually resulted in the liquidation of 800,000 leveraged Bitcoin positions valued at $ 12 billion.
The effects of the leverage of price volatility could extend into the areas of regulation
The multiplication effects of leverage on price movements in the BTC markets were also felt in the price of ETH, which declined relatively further than Bitcoin last week.
Mark Cuban, an American entrepreneur turned crypto enthusiast, took a look at the impact of ETH trading on Twitter: “De-levered markets are being crushed,” he said. “It doesn’t matter what the asset is. Stocks. Crypto. Debt. Houses. They bring forced liquidations and lower prices. However, crypto has the same problem that HFTs (high frequency traders) bring into stocks. Front running is legal because of gas fees lead to a latency that can be played. “
“It makes the drops fall faster and the profits rise faster,” he said.
This makes the drops fall faster and the profits rise faster. I’m not the expert, but at some point there should be an EIP that is set to single speed and gas and paid in DAI. Take the front running and gas charge inflation out of the equation
– Mark Cuban (@mcuban) May 20, 2021
Some analysts have suggested that the impact of leverage positions on crypto markets could have effects beyond price volatility. For example, Jake Chervinsky, General Counsel at Compound Finance, wrote on Twitter: “The speed and severity of this crash gives the SEC a simple excuse to reject this year’s Bitcoin ETF proposals.”
“The price trend appears to be driven by trading in derivatives on unregulated offshore exchanges, which the SEC has always been very concerned about,” he said. “I wouldn’t rule out an ETF just yet, but the odds are slim.”
Caitlin Long, founder and chief executive officer of AvantiBT, agreed, “The volatility caused by derivatives not only gives the SEC an excuse … it also increases the cost of capital to the ecosystem and delays its mainstreaming,” she said, adding that it “probably does.” no way to stop the crazy leverage. “
Yep @ jchervinsky – a group of institutional / # Bitcoin investors had exactly this convoy yest. The volatility caused by derivatives not only gives the SEC an excuse, it also increases the cost of capital for the ecosystem and delays its mainstreaming. Probably no way to stop the crazy leverage from https://t.co/6Qe7oErGCO
– Caitlin Long @ (@CaitlinLong_) May 23, 2021
Crypto loans may also have exacerbated the effect of BTC price movements
Aside from margin trading, some analysts believe the crypto lending industry may have played a role in last week’s market crash.
CNBC reported that crypto companies like BlockFi and Celsius, which offer interest-bearing crypto accounts, lend bitcoin to hedge funds and other professional traders. However, they also allow lenders to use their bitcoin holdings as collateral for money loans, which they can then use to buy even more bitcoin.
However, this can cause problems. CNBC stated, “For example, if someone took out a $ 1 million bitcoin-backed loan and the price dropped 30%, they could owe the lender 30% more.”
To protect themselves, some of these lenders have automatic sales triggers on their lenders’ collateral. Brian Kelly told CNBC: “[When] You have reached a certain security level, [lending] Companies will automatically sell your bitcoin and send the collateral to the lender. “
“This adds to the massive cascading effect – there was so much volume that most exchanges broke.”
What do you think of the impact of leveraged trading and crypto lending on Bitcoin price movements this week and last? Let us know in the comments below.