The recent downturn in the Bitcoin market, resulting in a plunge of over 5%, has been largely attributed to over-leveraged derivatives traders. The total open interest (OI) in Bitcoin derivatives across all exchanges was approximately $12 billion as of December 11, with Binance holding the largest portion. Notably, traders on ByBit were so heavily leveraged that they faced 40% annual funding rates, significantly contributing to the market volatility.
Adam Cochran, a partner at Cinneamhain Ventures, detailed this situation, explaining how such high levels of open interest, which represent the notional value of unsettled BTC derivatives, can lead to increased market volatility. He pointed out that this level of OI is about 0.1% of Bitcoin's total market cap, a threshold that often signals upcoming volatility shifts.
In the context of perpetual contracts, where one person's short is another's long, excessive leverage can unbalance the market. This imbalance necessitates liquidation days, which are essential for a healthy market to continue its upward trend. However, ByBit users, after being liquidated, began re-opening positions, pushing the OI back up, indicative of the market's resilience and potential for recovery.
As of the report, Bitcoin was trading at $41,869, rebounding from an intraday dip to $40,321 on December 11, suggesting a recovery phase following the high leverage-induced volatility.
Disclaimer: Please note that the information provided in this article is based on the referenced research articles. It is essential to conduct further research and analysis before making any investment decisions. The cryptocurrency market is highly volatile, and investors should exercise caution and consult with financial professionals before engaging in cryptocurrency trading or investment activities.
