$500M Crypto liquidated as Bitcoin dips below $34K: What's next?

01/18/2021

Bitcoin slid below $34,000 in the last 24hrs because of which the cryptocurrency market saw a liquidation of over $500million worth positions.

Around $500 million worth of cryptocurrency futures positions were liquidated in the past 24 hours. This mass liquidation of bitcoin positions happened before the price of Bitcoin (BTC) dipped below $34,000 on Jan. 17.

Why do so many positions liquidate overnight?

The price of Bitcoin rose by 6.7% from $35,500 to nearly $38,000. At the same time, the futures funding rate sharply increased indicating an over leveraged market.

Considering the average funding rate typically hovers around 0.01%, the futures market was overcrowded on the way up towards $38,000.

At this situation, Bitcoin price began to drop when several large sell orders hit the market at just above $38,000. As a result, $500 million in liquidation is not a large figure compared to the past week.

Is the Bitcoin reaching its bottom?

But the drop has not led the futures market’s open interest to decline, giving scope for a huge pullback. There are still a large number of traders betting on Bitcoin in the futures market.

A pseudonymous trader known as “Salsa Tekila' said that if Bitcoin falls below $30,000, it would enter “bear market territory.' Hence, in the near term, it is crucial for BTC to maintain $30,000 as a macro support area. He said:

“If we go below 30k it's bear market territory. We'd have enough underwater bagholders to keep us down for a long while. Until then, could go either way I reckon. If reclaim and hold above 40k, I think 50-60k vicinity plausible. Me thinking $BTC is topped is a bias, not a trade.'

In addition, CryptoQuant CEO Ki Young Ju, the open interest in the futures market is still skyrocketing. All the while, the on-chain signals that indicated buyer demand have stagnated in the past few days.

Based on the combination of the overcrowded derivatives market and the lack of buy signals, Ki wrote that the market is uncertain and that it may retest $30,000 again. He wrote:

“People trade $BTC with low leverage, open interest is skyrocketing, and the long-short ratio looks neutral. Strong on-chain buying signals that have driven this bull market hasn't come up so far. $BTC might retest 30k, so I don't have any position now in this uncertain market.'

This is an indicative of the heightened level of fear in the market and the lack of certainty in the short-term price trend of BTC.

On the other hand, some traders remain optimistic in the medium term, explaining that the current pullback from $40,000-levels was not only expected but also much-needed for the rally not to overheat.