Bitcoin Price is Trending Lower but $1 Billion Liquidations Are Still Rare

July 13, 2021      Divya Mathur

Bitcoin is having a tough time in the market since May when a crash shaved off 50% of its value and left it to struggle in the $30,000 to $42,000 range. Lately, the currency is attempting to breach the $36,000 level, but no amount of bullish confidence is helping it attain the goal. Predictably, Bitcoin bulls are exasperated but for the time being, they don’t have to worry about the liquidation of futures contracts. More than six months into 2021, there have only been 7 occasions where a contract of $1 billion or more was liquidated. And there’s a reasonable explanation for why these liquidations are rare.

Billion Dollar Futures Contracts Liquidations Are Unusual for Bitcoin

Liquidations exceeding or nearing $1 billion are not the usual norm for Bitcoin. In fact, they mostly take place when traders utilize excessive leverage. 

It is also encouraging that the primary cryptocurrency has evaded billion-dollar short-seller liquidations even when it was rallying by 19.4% in February. These liquidations reflect how leverage longs engage in rash decision-making and leave reduced margins on derivatives exchanges. 

Contrary to retail traders, who use high leverage and lose considerably to liquidations, intuitive investors are likely to be safeguarded and tend to opt for cash and carry trades.

This is one of the major reasons that is keeping $1 billion liquidations from becoming a headache for Bitcoin traders. 

The Role of Quarterly Futures Contracts in Bitcoin Futures Contracts Liquidations

Another factor to analyze in this case is the quarterly futures contracts, which do not trade at par with normal spot exchange prices. Their trade carries a premium depending on whether the market is bullish or neutral, which can go from 5% up to 15%.

This basis(the difference between the spot price and price of the futures contract) can be compared against the lending rate for stablecoin because when sellers demand higher prices, it leads to postponement of settlements that can lead to a price difference. The scenario indicated here makes it possible for whales to acquire Bitcoin at spot exchanges and short the futures at the same time to collect a premium on the futures contract.

While these traders are represented as ‘short interest’, they are actually neutral. Therefore, the outcomes here will be unaffected by market movement in either direction.

Bitcoin Perpetual Futures Funding Rate

Perpetual futures funding rate is also a good indicator of investor sentiment and can be used to project the incoming liquidations. It usually turns positive when longs demand more leverage.

Data highlights that there hasn’t been a single day when the 8-hour funding rate surpassed 0.5% since May 20. This finding suggests that buyers are not prepared to use higher leverages and without them, it becomes difficult to create $1 billion liquidations

An Overview of Open Interests Declined Along At the Same Time as Bitcoin

Bitcoin futures aggregate open interest crossed the $20 billion mark in March, but during that time, a $1 billion liquidation made up only 5% of the outstanding total. Given that open interest currently stands at $11.8 billion, the same $1 billion would make up 8.5% of the aggregate number of contracts.

Clearly, it is becoming increasingly difficult for $1 billion futures contracts liquidations to take place because buyers simply don’t want to utilize higher leverages, and sellers are more or less hedged. Till there’s a considerable change in these indicators, Bitcoin bulls can rest easy.

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Divya Mathur
Divya Mathur

Divya is a postgraduate from Jawaharlal Nehru University specializing in International Relations and a professional writer with more than 5 years of experience writing for the web. She is an avid reader interested in the global financial system and the effects of decentralization. At Cryptoknowmics, she hopes to deliver clear and understandable content to inform readers about the latest events in the crypto sector.