June 20, 2021

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Bitcoin hit by $2.7 billion futures liquidation frenzy: What happens next?

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Over $2.7 billion worth of futures contracts got liquidated in the last 24 hours, based on data from Bybt.com. This caused the price of Bitcoin (BTC) to see a large drop in a short time frame as it plunged from over $41,000 to sub-$32,600.

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BTC/USDT 4-hour price chart (Binance). Source: TradingView.com

Why would mass liquidations cause Bitcoin to drop?

In the futures market, liquidations of positions occur because traders are borrowing additional capital to trade with larger positions.

For example, exchanges in the Bitcoin futures market typically offer up to 100x leverage. This allows traders to borrow 100 times of their initial capital to trade BTC.

The downside of leverage is that when the price of Bitcoin sees a minor drop, it can cause a position to get liquidated, or be worthless.

Liquidated long on XBTUSD: Sell 1,235,411 @ 34710.5 ~ Multi kill ~ If you can dodge a liquidation you can dodge anything

— REKT (@BXRekt) January 11, 2021

For instance, let’s say a trader uses 10x leverage and borrows 10 times of his capital to buy Bitcoin at $40,000. If the price drops 10% to $36,000, the position would getTitle: Bitcoin hit by $2.7 billion futures liquidation frenzy: What happens next?
Sourced From: cointelegraph.com/news/bitcoin-hit-by-2-7-billion-futures-liquidation-frenzy-what-happens-next
Published Date: Mon, 11 Jan 2021 12:45:00 +0000