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Bitcoin Data Indicates Low Liquidation Amid 70% Price Surge

Since the start of the year, Bitcoin (BTC) has been in an uptrend after recording a 70% spike since January and hitting a nine-month high of more than $29,000. Despite the sharp price rally, the overall use of leverages is at its lowest, which suggests a risk of “liquidation-induced” price sideways.

Liquidations And Bullish Or Bearish Moves

It is worth noting that liquidation refers to the forced end of a long bullish run with a bearish short position in leveraged futures markets in the digital asset industry. Additionally, liquidation allows traders to start new positions worth over the amount deposited as margins.

This implies that forced closures for trading assets or their equivalents occur when a trading platform fails to reach its margin shortage, which stems from the market moving against its bearish or bullish prediction. Furthermore, short liquidations that trigger bullish moves tend to happen when the leverage levels in the market are high.

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More importantly, the degree of leverage is calculated by the ratio of the value of the USD locked in perpetual futures and the market capitalization of the crypto sector. Thus, this brings about more shorts which leads to a short squeeze.

Conversely, long liquidation worsens bearish momentums but triggers a long squeeze. Short or long squeezes were common during the 2021 bull rally and at the start of the bear trend in 2022.

This happens when the degree of leverage concerning the market size is high, and coin prices would shed billions of dollars from leveraged positions. So far, in 2023, this ratio has been declining steadily.

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Experts’ Verdict

In their latest weekly crypto market newsletter, analysts at Blockware Solution stated that high open interest relative to the market valuation means the market will soon be vulnerable to a liquidation or short squeeze. According to them, this would result in a volatile price swing.

The analysts added that investors’ medium-term strategy of reducing open interest has remained steady. They opined that this signifies another reassurance that cryptos’ values are less likely to tumble to the levels seen last year in the event of a price downtrend.

Since November 2022 and after the FTX collapse, the perpetual futures open interest relative to the market ratio has been downward. Before its fall, FTX was the third-largest crypto exchange and is one of the most sought-after platforms for trading perpetual futures.

The Blockware Solutions experts further revealed that the ratio has remained low despite the recent price surge in the crypto market, which is a sign of low investor risk appetite. The analysts also noted that BTC has been trading sideways over the last three weeks with no signs of open interest build-up.

According to them, perpetual futures are more in demand during periods of price sideways, as evidenced by the events before the spectacular crash of FTX last year. Several crypto exchanges were impacted by the FTX contagion, with some filing for Chapter 11 bankruptcies to restructure their business operations.

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Similarly, regulators from several jurisdictions have doubled on ensuring compliance with policies governing their local financial markets. Since the start of this year, the US Securities and Exchange Commission (SEC) has been cracking down on some crypto firms, especially crypto exchanges.

On-chain data shows that BTC’s price has traded between $27K and $29K over the past three weeks.


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Bradley Nelson

Bradley Nelson is a US based cryptocurrency news writer for Tokenhell, he helps readers stay up to date with the latest trends and news from the blockchain and crypto world. Bradley has been a crypto enthusiast since 2018.

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