Liquidations and leverage trading caused a collapse in the cryptocurrency market over the past week. Bitcoin plummeted by up to 31%, nearing $30,000 last Wednesday, while Ethereum saw a drop of 44%, falling below $2,000 in one go. Although both managed to recover some losses, these crashes caused significant distress in crypto assets. According to data from Bybit.com, $9.4 billion was liquidated, affecting over 887,000 traders within 24 hours up to Thursday morning in Singapore time.
In a note following the major collapse, Tom Lee from Fundstrat Global Advisors stated that the cryptocurrency market provides substantial leverage for traders, which always exposes new traders to the risk of forced selling after declines in digital currencies. Vijay Ayyar, Head of Asia-Pacific at Luno, mentioned that "system overload, liquidations, and similar factors lead to such deep pullbacks. Cryptocurrencies resemble the 'Wild West' in their ferocity, surpassing any other asset class, where you can trade in some markets with leverage of 50 to 100 times. What we saw on the exchanges was a significant resetting of financing due to traders with excessively large debts."
#### The Third Journey
This could be referred to as the third astounding journey for Bitcoin and Ethereum within two months, where forced selling has disrupted the markets, following the liquidations from Archegos Capital Management in late March and the rapid decline in Taiwanese stocks last week. In a market where leverage reaching 100 times is not uncommon, the rapid declines in cryptocurrencies on Wednesday highlighted the severe negative risks that could anger investors. However, many consider this a feature of cryptocurrency rather than a flaw. This sentiment is encapsulated by Arthur Hayes, co-founder of BitMEX, who stated at a conference in 2019 that "Bitcoin is fun, but it’s much more fun when the leverage goes to a hundred times."
#### Recovery Prospects
This may not be entirely surprising and could help cleanse the system of some obstacles. According to Todd Morakis, founder of digital finance products and service provider JST Capital, liquidations often occur "at their lowest levels, as always, and during times following significant sell-offs, trading usually remains within a confined range, with much less leverage in the system."
Conditions in the market on Thursday show early signs of recovery after the blow, although it may take a few days to determine whether sentiment can stabilize. Jeffrey Wang, Head of Americas at Amber Group, a global crypto financing service provider, said last Wednesday: "We saw a liquidation of many leveraged positions in a short time frame. This was a significant flow, and it may be necessary to remove some impurities from the highly leveraged positions if the market wants to continue rising. After the move that occurred in the last 24 hours, the coming days will be vital to gauge the overall sentiment direction."
