Bitcoin (Bitcoin) It may have been difficult to break the resistance level of $36,000 in the past three weeks, but the bulls now worry about one thing less: the liquidation of cascade futures contracts.
One might think that Bitcoin usually needs to be liquidated $1 billion. Despite this, traders tend to remember recent exaggerated changes better than any other price movement, especially when prices plummet and people lose money.
This negative bias means that even if various price effects of the same intensity occur, unpleasant emotions and events have a more significant impact on the psychological state of traders.
E.g, Multiple studies have shown Winning $500 from the lottery has two to three times less “influence” than losing the same amount from the gambler’s personal wallet.
At present, there have been six and a half months since 2021, and only seven long contracts of USD 1 billion or more have been liquidated. Therefore, these are not the norm, but very unusual situations that only happen when traders use excessive leverage.
More importantly, even if Bitcoin rose 19.4% on February 8, there was no short seller liquidation of $1 billion. These liquidations just show that leveraged bulls tend to be more reckless, and derivatives exchanges have fewer margins.
Although retail traders use high leverage and eventually become victims of liquidation, more intuitive traders who are more likely to bet on falling prices Fully hedge and conduct “cash and arbitrage” transactions.
This is one of the three reasons why we should not worry about the clearing of US$1 billion futures at this time.
Cash and arbitrage transactions have lower clearing risks
The trading prices of quarterly futures contracts are usually different from those on regular spot exchanges. Usually, when the market is in a neutral or bullish state, there will be a premium, and the annualized range is between 5% and 15%.
This interest rate (called the basis) is usually equivalent to the stable currency lending rate, because the decision to postpone settlement means that sellers demand higher prices, which can lead to price differences.
This situation creates space for arbitrage platforms and whales to buy bitcoins on regular spot exchanges while shorting futures to collect premiums on futures contracts.
Although these traders will show “short interest”, they are actually neutral. Therefore, the result will have nothing to do with the rise or fall of the market.
Today, the bulls are far from over-leveraged
As the price of Bitcoin rose to a high of $65,800, traders were very optimistic about it, but after the brutal liquidation of long contracts between May 11 and May 23, this sentiment turned bearish as BTC plummeted from $58,50053 % To 31,000 USD.
Viewing the interest rate of perpetual contract (reverse swap) financing is a good way to gauge investor sentiment. Whenever the bulls need more leverage, the indicator becomes positive.
Since May 20, there has not been an 8-hour financing rate higher than 0.05% in a single day. This evidence shows that buyers are reluctant to use high leverage, and without it, it would be more difficult to create a liquidation of $1 billion or more.
When Bitcoin prices plummeted, open positions also collapsed
Each futures contract requires a buyer and seller of exactly the same size, and the total notional value of open positions is measured in U.S. dollars. This means that as the price of Bitcoin falls, the indicator will also fall.
The above chart shows how open futures contracts exceeded US$20 billion by mid-March. During this period, the US$1 billion liquidation accounted for only 5% of the total outstanding amount.
Taking into account the current $11.8 billion in open positions, the same $1 billion will account for 8.5% of the total number of contracts.
In short, since buyers are not over-using leverage, sellers seem to be fully hedged, so cascading liquidation becomes more difficult. Unless these indicators change significantly, the bulls can remain calm.
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