Over the weekend of December 4-5, a confluence of factors led to a dramatic crash in crypto markets. Against an uncertain macro backdrop of potential tighter monetary policy, surging inflation and fears over the new Omicron variant of Covid-19, derivative markets added fuel to the fire resulting in some US$2.5 billion in liquidated positions in 24 hours.
Double-Digit Drawdowns Across the Board
As the NASDAQ dropped 2 percent on December 3 against a broader risk-off sentiment, crypto markets tanked, resulting in all of the top 20 cryptocurrencies by market cap, save for stablecoins, posting double-digit losses within 24 hours. BTC dropped 18 percent within 24 hours, while ETH faired slightly better, dropping 17 percent in the same period.
According to CoinGecko, the market cap of the entire crypto market dropped by 15 percent to US$2.34 trillion, down from a high of over US$3 trillion when bitcoin soared above $US$69,000.
Commentators have suggested that large institutional selling triggered a broader market shift, with reports indicating that one institution alone sold over US$500 million in bitcoin. This, the report continues, triggered “aggressive liquidations” in the crypto derivatives market:
The other factor driving the sharp declines across the board was that, comparatively speaking, the market was “thin” as it occurred outside of typical trading hours.
Leveraged Liquidations, Nothing New
By definition, leveraged trading amplifies both gains and losses. When the market is bullish, traders tend to go long and pile on the leverage. This works well until the market moves against you. When that happens, traders need to post more collateral to maintain the margin requirement, or face forced liquidation. At scale, a failure by traders to meet their maintenance margin creates a cascading liquidity flush, creating rapid double-digit declines as seen in April this year.
Following April’s meltdown, many exchanges reduced leverage available to traders from 100x to 20x. Notwithstanding, bloodbaths such as those experienced over the December 4-5 weekend remain largely driven by leverage.
Will Clemente, a leading on-chain analyst who is known in the community for “calling it like it is”, pointed out the benefit of flushing liquidity and maintained his overall bullish view toward Bitcoin.
Justin d’Anethan, Hong Kong-based head of exchange sales at cryptocurrency exchange EQONEX, believes many investors will view this recent decline as an opportunity:
If anything, this is the opportunity to buy the dip for many investors who might have previously felt like they missed the boat.
Justin d’Anethan, head of exchange sales, EQONEX
Following the meltdown, crypto markets have recovered to a limited extent. At the time of publication, both ETH and BTC are up from the weekend’s low. ETH is up 11 percent, trading at US$4,122, while BTC is up only 5 percent, trading at US$48,656.
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