The High Funding Rate as the Cause of Bitcoin’s Flash Crash
The recent flash crash of Bitcoin, which saw its price drop from over $45,500 to as low as $41,100, has sparked debate within the crypto community. While some attribute the crash to rumors of the SEC not approving Bitcoin ETFs in January, The Wolf Of All Streets suggests a different explanation.
According to the analyst, the ultra-high positive funding rate on perpetual futures contracts is to blame. The funding rate is a mechanism that adjusts futures contract prices based on the spot price of Bitcoin. In recent months, the funding rate reached multi-month highs, creating an imbalance in the market with more long positions than short positions.
Liquidations and Market Imbalance
As Bitcoin’s price began to decline rapidly, exchanges had to unwind long positions, resulting in a wave of liquidations. Coinglass records show that over $669 million were liquidated on January 3, mostly consisting of long positions. OKX closed the most positions, followed by Binance, Huobi, and Bybit.
Intentional Manipulation by “Degens”
The Wolf Of All Streets suggests that the flash crash was not a natural market event but an intentional move orchestrated by “degens.” The high funding rate created a situation where leveraged long positions had to be liquidated for equilibrium to be reinstated in the market. This aligns with warnings from other market observers about potential blow-ups in the perpetual futures market due to high leverage and funding rates.
Uncertain Price Reaction and Bearish Short-Term Outlook
The future price reaction is unclear, but it is evident that bears have control in the short term. The recent sell-off is accompanied by high trading volume and may lead to further downward movement towards $38,000 or lower in the coming sessions.
Hot Take: Bitcoin Flash Crash Caused by High Funding Rate and Market Manipulation
The recent flash crash of Bitcoin has brought attention to the role of the high funding rate on perpetual futures contracts and potential market manipulation. The imbalance created by an influx of long positions and leveraged trading led to liquidations when the price declined rapidly. This intentional move, orchestrated by “degens,” highlights the risks associated with high leverage and funding rates in the crypto market. The uncertain price reaction and bearish short-term outlook suggest that caution is warranted for traders and investors.
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