Bitcoin Experiences Volatility as Derivatives Traders Drive Market Flushout
The Bitcoin market has seen a significant drop of over 5% this week, largely due to derivatives traders and over-leveraged positions. While this may seem like a negative development, it can actually be considered healthy for the overall market.
Bitcoin Leverage Loons
Adam Cochran, a partner at Cinneamhain Ventures, analyzed the flushout in detail. He noted that the open interest (OI) for Bitcoin derivatives was around $12 billion on December 11. OI is an indicator of the notional value of unsettled or expiring BTC derivatives.
Cochran observed that Binance represents a large portion of the OI and their funding rate has been high. Funding rates are periodic payments made based on the difference between perpetual contract markets and spot prices.
The Problem with High Funding Rates
Cochran identified the issue as degens paying very high funding rates. ByBit users, for example, were paying 40% annual funding rates due to their high leverage.
The Importance of Liquidation Days
Cochran explained that constant upward movement without downside can lead to an imbalanced market with excessive leverage. Therefore, liquidation days are necessary to maintain balance and prevent market manipulation.
A Healthy Flushout
In this case, ByBit users were liquidated but quickly reopened positions to increase the OI. These leverage flushes can be identified when Bitcoin’s price action aligns with altcoins.
According to Cochran, leverage flushes can act as a blow-off that reverts a trend if there isn’t enough momentum left. However, a stronger reset can provide an opportunity for the trend to regain momentum.
BTC’s current price is $41,869, recovering from a dip to $40,321 on December 11.
Hot Take: Market Flushouts Are Necessary for Healthy Crypto Markets
While the recent drop in the Bitcoin market may be unsettling, it is actually a healthy development. Flushouts driven by derivatives traders and over-leveraged positions help maintain balance and prevent excessive leverage in the market. These events provide an opportunity for trends to reset and regain momentum. Therefore, although they may cause short-term volatility, they contribute to the long-term stability of the crypto market.
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