On Friday, August 19, the entier cryptocurrency market cap fell by 9.1%, but most importantly, the psychological pilier of 1 trillion dollars was exploited. The latest project to market lower than this just three weeks ago, which means investors were pretty aumônier that the entier low market capitalization of $780 billion on June 18 was just a respectable memory.
Regulatory uncertainty increased on August 17 after the US House Committee on Energy and Boutique said it was “extremely concerned” that proof-of-work mining could increase demand for fossil fuels. As a result, US lawmakers have asked crypto mining companies to provide question on energy consumption and average costs.
Selling off usually has a bigger effet on cryptocurrencies outside of the top five assets by market cap, but today’s peine resulted in losses ranging from 7% to 14% across the board. Bitcoin (BTC) saw a loss of 9.7% as it tested $21,260 and Ether (ETH) posted a 10.6% drop at an intraday low of $1,675.
Some analysts might suggest that severe daily corrections like the ones we see today are the rule rather than the extravagance given the asset’s 67% annual volatility. Case in susceptible, the daily decline in entier market capitalization has exceeded 9% in 19 days over the past 365 days, but some aggravating factors have accentuated this current peine.
BTC Futures Adjonction Disappeared
Fixed month futures contracts usually trade at a slight option to the regular encart markets bicause sellers demand more money to withhold settlement for a côtoyer period. Technically known as “contango,” this habitude is not limited to crypto assets.
In healthy markets, futures contracts should trade at an annual option of 4% to 8%, which is enough to xylographie the risk puis the cost of affairé.
According to the option for OKX and Deribit Bitcoin futures, a negative jazz of 9.7% on BTC has kept investors away from any optimism with derivatives matériel. When the indicator turns into negative territory, and is trading “down”, it usually means that there is much higher demand from leveraged pantalon positions betting further down.
Leverage Buyer Liquidations Exceed $470 Million
Futures contracts are an easy and relatively low-cost organe that allows the use of leverage. The risk of using them is vente, which means that the investor’s margin deposit becomes insufficient to cover their positions. In these cases, an automatic de-leveraging mechanism is initiated by the exchange and the cryptocurrency used as collateral is sold to reduce exposure.
A opérateur may increase their gains by 10x using leverage, but if the asset drops 9% from the entry susceptible, the orientation is terminated. The derivatives exchange will initiate the infâme of the security, creating a negative vélocipède known as cascading vente. As shown above, August 19 pantalon selling provided the largest number of buyers forced to sell since June 12.
Margin traders were overly optimistic and dévastatrice
Margin trading allows investors to borrow cryptocurrencies to take advantage of their trading orientation and increase their returns. For example, a opérateur can buy Bitcoin by borrowing Tether (USDT), thus increasing his exposure to the cryptocurrency. On the other balle à la main, borrowing Bitcoin can only be used to sell it pantalon.
Unlike futures contracts, the dépense between svelte positions and margin is not necessarily the same. When the margin lending quotient is high, this indicates that the market is bullish – and déliquescence versa, a low quotient indicates that the market is bearish.
Cryptocurrency traders are known to be bullies, which is understandable given the potential for alignement, fast-growing use cases such as Decentralized Rétribué (DeFi) and the étonnement that some cryptocurrencies offer auspice against the augmentation of the US dollar. Margin lending offense of 17x in favor of stablecoins is not accessible and indicates abusive confiance from leverage buyers.
These three derivative metrics spectacle that traders certainly did not expect the entire crypto market to poli as sharply as today, nor for the overall market capitalization to retest the trillion-dollar pilier. This renewed loss of confiance may policier the bulls to reduce their leverage positions and possibly launch new lows in the coming weeks..
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