Over $1 billion worth of crypto short positions were liquidated in a 24-hour span amid Bitcoin’s rally over $40,000 this week.
According to Bybt, more than 887,000 derivatives traders liquidated positions valued over $1 billion, with 92% of the liquidated positions being short. While investors who had placed long bets on the cryptocurrency saw massive gains, the instant price action also left short sellers with one of the largest total magnitudes of losses in dollar terms.
On Binance, the spread between Bitcoin futures and the spot price reached $8,000. The BTC/Tether perpetual futures contract surged to $48,000 from $38,000 on Sunday.
The Bitcoin price is currently hovering above the $40,000 level, even though Amazon denied a City A.M. report that said the largest e-commerce giant will accept Bitcoin in 2021 and introduce its own token by 2022.
It was the largest short-squeeze in Bitcoin history
The dramatic Bitcoin price rally was marked as the largest short-squeeze in its history, with over $1 billion short positions liquidated in just a matter of a few hours.
In late December, $1 billion worth of liquidations occurred in a few days when Bitcoin reached the $20,000 level for the first time since 2017.
A $500 million liquidation happened after Tesla announced it would accept Bitcoin as a valid form of payment. The $1.2 billion worth of liquidation occurred at the end of January when Musk added #Bitcoin to his Twitter bio.
Although the latest $1 billion crypto liquidation looks slightly smaller in value when compared to Musk’s hashtag related rally, it seems to be among the largest short squeezes in the history of cryptocurrency in terms of the time it took to liquidate a billion-dollar worth of positions.
What were the causes of the latest short squeeze?
The latest short squeeze was the outcome of the bearish trend in crypto markets over the last two months.
The increasing crypto regulations, declining volume and clampdown in China had erased hundreds of billions of dollars from Bitcoin value. Last week, Bitcoin’s price fell below the $30,000 level for the first time in 2021 and investors were expecting the price to go down further in the days ahead.
Before digging further into factors that immediately changed investor sentiments, let’s briefly review the difference between spot and derivative markets. This is because short selling in derivative markets caused the biggest liquidation in Bitcoin history.
Spot markets involve buying and selling real cryptocurrencies while investors trade contracts in derivative markets, and the most popular crypto derivatives are crypto futures, perpetual contracts and crypto options.
In derivative markets, which surpassed the spot markets trading volume this year, investors heavily bet against the most valuable cryptocurrency. Moreover, numerous investors had used leverage for crypto short positions.
Since cryptocurrencies are considered one of the most volatile and unpredictable assets in the world, the nascent market has the potential to make or erase hundreds of billions of dollars only on a single piece of news.
Bitcoin price moved back above the $30,000 level following reports about Amazon’s plan to accept cryptocurrency and Elon Musk’s commentary at the B-Word conference.
Short investors started liquidating their position and began buying at higher prices in order to reverse losses they faced on wrong short bets. This situation created the short squeeze and helped the price to go up quickly.
“This is business as usual for crypto – a market that is known to be highly volatile and exposed to high levels of product leverage on these exchanges,” Research Analyst Ryan Todd at The Block told Business Insider. “A perfect recipe for liquidations that can cut both ways depending on sharp spot movements to the up or downside.”
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