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Bitcoin

3 reasons why Bitcoin’s drop to $21K and the market could be worse than you think !

Last Friday, the total market cap decreased by 9.1%, reaching the level of 1 trillion dollars, which is psychological support. The market’s latest venture below this just three weeks ago, meaning investors were pretty confident that the $780 billion total market-cap low on June 18 was a mere distant memory.

The United States House Committee on Energy and Commerce  expressed that they think that the proof- of-work can increase the demand for fossil fuels and they are concerned about this issue. As a result, U.S. lawmakers requested the crypto mining companies to provide information on energy consumption and average costs.

Typically, sell-offs have a greater impact on cryptocurrencies outside of the top 5 assets by market capitalization, but today’s correction presented losses ranging from 7% to 14% across the board. Bitcoin (BTC) saw a 9.7% loss as it tested $21,260 and Ether (ETH) presented a 10.6% drop at its $1,675 intraday low. Some analysts consider these declines to be the norm.

The BTC Futures premium vanished

The fixed-month futures contracts usually trade at a slight premium to regular spot markets because sellers demand more money to withhold settlement for longer. Technically known as “contango,” this situation is not exclusive to crypto assets.

In healthy markets, futures should trade at a 4% to 8% annualized premium, which is enough to compensate for the risks plus the cost of capital.

Bitcoin
Bitcoin 3-month futures’ annualized premium. Source: Laevitas

According to the OKX and Deribit Bitcoin futures premium, the 9.7% negative swing on BTC caused investors to eliminate any optimism using derivatives instruments. When the indicator flips to the negative area, trading in “backwardation,” it typically means there is much higher demand from leveraged shorts who are betting on further downside.

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Leverage buyers’ liquidations exceeded $470 million

Futures contracts allow the use of leverage, although this may seem like convenience, it has great risks. If the opened position loses at a certain level, the deal will automatically terminate and the investor will sell all of his money and the investor will have nothing.

bitcoin
Aggregate crypto 24-hour liquidations, USD. Source: Coinglass

A trader might increase their gains by 20x using leverage, but if the asset drops 4.5% from their entry point, the position is terminated. The derivatives exchange will proceed to sell the collateral, creating a negative loop known as a cascading liquidation. As depicted above, the Aug. 19 sell-off presented the highest number of buyers being forced into selling since June 12.

Margin traders are hunted

Margin trading can allow traders to be confident in their position and earn more, borrowing crypto and using it. Unlike futures contracts, the balance between margin longs and shorts isn’t necessarily matched. When the margin lending ratio is high, it indicates that the market is bullish—the opposite, a low ratio, signals that the market is bearish.

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OKX USDT/BTC margin lending ratio. Source: OKX

These three derivatives metrics show traders were definitely not expecting the entire crypto market to correct as sharply as today, nor for the total market capitalization to retest the $1 trillion support. This renewed loss of confidence might cause bulls to further reduce their leverage positions and possibly trigger new lows in the coming weeks.

About Hama Amefiz

Amefiz is a professional blockchain, cryptocurrency and tech journalist, regular contributor to newsbsc.com who is writing analysis about the latest developments in the cryptocurrency and blockchain space.

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