Recurring market commentary on what’s happening in the crypto markets, summarized by the Crypto Broker team at Crypto Finance AG.
Market commentary
Good Morning!
Another liquidation cascade meant another bloodbath. Welcome to crypto! It is funny how after something like this occurs, I without fail get asked "So, what happened?" Most of the time I have to disappoint people with my answer: there was no clear trigger. Having said that, the March 20 and May 21 sell-offs were rare occasions where there were clear triggers and I had an answer.
I do have to say that the structure of this current sell-off is a bit odd. Let me list a few things that are different about it:
- Funding rates for perps and term futures have been very subdued
- Open Interest (OI) has been high but my argument is that with more and more players entering the market this number will continuously go up over the next few years
- Ethereum vs. Bitcoin (ETHBTC) has held very well and is actually pushing higher (some other coins have held remarkably well too: more info below)
What was quite normal was the timing. The lowest liquidity in crypto is always between the US closing and Asia opening on a Friday to Saturday date switch.
Timeline and the chain reaction
The venue where it all started was potentially Deribit. A Twitter account I follow posted this:
Deribit of all people led this dump
3-5% discount from the rest of the market. pic.twitter.com/X5w76hrxtg
— lowstrife (@lowstrife) December 4, 2021
It looks like during the low liquidity phase someone had to sell a lot of BTC perp futures. It is unclear if it was a complete wipeout (portfolio liquidation) or if this trader had to hedge a position. In the end, it did not really matter because other effects took over and pushed the price.
Then liquidations were triggered. It started when the price moved below $53k. The market was able to take the first hit and we moved $2k lower in just three minutes. After that, we had a five-minute regrouping of the market, and the next wave of liquidations came in, which pushed the price down to $48k.
Then, I believe, the blood on the streets attracted the sharks. The market regrouped for about 15-20 minutes, and then the high volume went through, accompanied by additional liquidations, and we printed the low of roughly $41-42k (depending on which exchange you use to check the price).
That last dip took no more than 10 minutes and then reversed again within three to five minutes, going back up to $47.5k. The Head of Trading at Alameda, Sam Trabucco (one of the big sharks out there), put it into a short thread.
Why is this crash different to others?
Sam mentions that a large amount of leveraged longs were liquidated. I have trouble seeing that when I look at funding rates (for most of us that are the only metrics we have to measure leverage within the system). What I can add as a market observation is that traders have become a bit complacent by thinking that with so much institutional money flowing in, the crashes should be far less severe. If I understand Sam correctly, he was on the other side of many of those leveraged longs. He also mentions that on the day that the basis moved out by several percentage points, he closed his long spot / short futures position. I wonder where he gets his information regarding how high the leverage is in the market.
OI was reduced by approximately $5bn, which was not only liquidations (be aware that some exchanges such as Binance and Bybit have stopped reporting their liquidation data), but also profit taking from Alameda and the like.
Alternative Layer 1
This leaves me now with my last point: Ethereum vs. Bitcoin (ETHBTC).
We had many discussions at our trading desk regarding ETH and other L1 coins with smart contract capabilities (e.g. ATOM, DOT, SOL, IOTA, LUNA, AVAX, and ADA). In the end, we decided to switch some of our long exposure from ETH into several other L1 coins. Our reasoning was that they will outperform ETH on the way up, and if the market comes crashing down, they will only match what ETH is losing.
Yep, we were wrong about that one, but some of those L1 coins have also held very well, and at the time of writing this report, some of them are already starting to recover.
I cannot emphasise this enough: leverage in the crypto market is a widow maker. You really need to know what you are doing, or only play with money that you can afford to lose.
The trading team wishes you a great week!
All intellectual property, proprietary and other rights and interests in this publication and the subject matter hereof are owned by Crypto Broker AG including, without limitation, all registered design, copyright, trademark and service mark rights.
Disclaimer
This publication provided by Crypto Broker AG, a corporate entity registered under Swiss law, is published for information purposes only. This publication shall not constitute any investment advice respectively does not constitute an offer, solicitation or recommendation to acquire or dispose of any investment or to engage in any other transaction. This publication is not intended for solicitation purposes but only for use as general information. All descriptions, examples and calculations contained in this publication are for illustrative purposes only. While reasonable care has been taken in the preparation of this publication to provide details that are accurate and not misleading at the time of publication, Crypto Broker AG (a) does not make any representations or warranties regarding the information contained herein, whether express or implied, including without limitation any implied warranty of merchantability or fitness for a particular purpose or any warranty with respect to the accuracy, correctness, quality, completeness or timeliness of such information, and (b) shall not be responsible or liable for any third party’s use of any information contained herein under any circumstances, including, without limitation, in connection with actual trading or otherwise or for any errors or omissions contained in this publication.
Risk disclosure
Investments in virtual currencies are high-risk investments with the risk of total loss of the investment and you should not invest in virtual currencies unless you understand and can bear the risks involved with such investments. No information provided in this publication shall constitute investment advice. Crypto Broker AG excludes its liability for any losses arising from the use of, or reliance on, information provided in this publication.
