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A woman shows different visual representations of cryptocurrencies, ripple, bitcoin, litecoin and ethereum on February 1, 2018 in Paris. Photo: Getty Images

Bitcoin rout wipes out US$10 billion in leveraged positions in US$500 billion sell-off, and counting

  • Outstanding futures contracts have tumbled from a US$28 billion peak in April to just US$13 billion Thursday
  • Bitcoin was recently quoted at US$39,967, clawing back some of its losses over two days
Bitcoin

Cryptocurrency markets are stabilising after a US$500 billion bitcoin wipeout snuffed out a slew of speculative excesses that had been building for months.

Signals across the virtual-currency complex show leveraged positions are getting flushed out while dip-buyers are emerging – helping fuel a return toward US$40,000 for the world’s biggest token.

As the dust settles following the Wednesday crash, Bybt data shows liquidations have totalled roughly US$10 billion since Wednesday. Outstanding futures contracts have tumbled from a US$28 billion peak in April to just US$13 billion Thursday.

The hundreds of billions of dollars changing hands across derivatives this week eclipsed activity in the cash market, as speculators rushed to close positions in the meltdown.

“The sell-off was greatly exacerbated by a lot of leverage,” said Martin Green, chief executive officer at Cambrian Asset Management, a US$150 million crypto fund. “Now that the excess leverage has been liquidated, we have seen longs and leverage starting to be placed once again.”

It all shows the power of crypto derivatives markets, where activity has exploded with the rise of multibillion exchanges that cater to Wall Street and retail traders alike. The extreme volatility and big money in digital currencies is starting to draw regulatory attention, with the US Treasury Department calling for stronger tax compliance within the space.

This year’s relentless boom has pushed the likes of ethereum up as much as 2,200 per cent, while Dogecoin – a token created as a joke – became as valuable as blue-chip American companies. Things went awry this week as bitcoin slid toward US$30,000, fuelled by regulatory missives from China’s central bank while Tesla billionaire Elon Musk tempered his enthusiasm for the asset.

“You got all those bearish news and eventually you hit the point where a lot of the leveraged positions were getting liquidated,” said Justin d’Anethan, sales manager at EQUOS, a crypto exchange run by Diginex. “When that happens, it’s just a cascading fall.”

Volumes surged Wednesday across exchanges, many of which offer high leverage untethered by regulations. As of roughly 7am in New York, the largest crypto platform Binance had recorded nearly US$200 billion in derivatives volume over the preceding 24 hours. At OKEx and Bybit, activity had more than doubled from the prior period.

To make things worse, the frenzy coincided with disruptions at Binance, Coinbase and Kraken, deepening panic across cryptoland.

Open interest in both options and futures stabilised on Wednesday afternoon in New York trading, as major investors from Cathie Wood to Justin Sun soothed nerves with bullish remarks.

On Deribit, the biggest crypto options exchange, a volatility index similar to the VIX dropped to 117 on Thursday from a high of 132 yesterday.

One signal in the futures market suggests things are beginning to stabilise.

Speculative bulls on Thursday are back trading perpetual crypto futures – where no underlying asset is delivered – to narrow their discount to the spot price. The spread, known as the funding rate, is typically at a premium during rallies amid strong demand to go long, but it plunged into negative territory yesterday.

“There is little question that the reports of margin calls and other forms of the ‘unwinding of leverage’ took place yesterday,” said Matt Maley, chief market strategist for Miller Tabak + Co. “The fact that they were all able to close well above their lows tells us that much of that ‘forced selling’ faded during the day.”

This article appeared in the South China Morning Post print edition as: Markets stabilising after US$500b bitcoin wipeout
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