Back

How Over-Leveraged Derivatives Degens Caused Another Bitcoin Crash 

author avatar

Written by
Martin Young

editor avatar

Edited by
Ciaran Lyons

12 December 2023 04:25 UTC
Trusted
  • Bitcoin's recent plunge has been attributed to over-leveraged derivatives traders, causing increased market volatility.
  • Bitcoin open interest was around $12 billion across all exchanges by Dec. 11, with Binance representing the largest chunk.
  • ByBit traders were identified as the problem, being so leveraged long they were paying 40% funding rates.
Promo

Bitcoin market volatility is back and the asset has plunged more than 5% since the beginning of this week. The big dump has been largely driven by derivatives traders and over-leveraged positions. Therefore, the flushout could be considered healthy for markets. 

Crypto markets are down again today and while the correction was predicted by analysts, the pullback appears to have been catalyzed by derivatives speculators. 

Bitcoin Leverage Loons

Sponsored
Sponsored

On Dec. 12, Cinneamhain Ventures partner Adam Cochran broke down the Bitcoin flush out with more detail on funding rates and open interest. 

Bitcoin open interest was around $12 billion across all exchanges as of Dec. 11. OI is a measure of the notional value of BTC derivatives that have yet to be settled or expire. 

Bybit OI. Source: X/@adamscochran
Bybit OI. Source: X/@adamscochran

Cochran noted that this level “is one where we can start to expect increases in volatility if its skewed,” as it is about 0.1% of the total market cap.

Sponsored
Sponsored

He also observed that Binance represents the largest individual chunk of that OI and their funding rate has been on the high end.

Funding Rates are periodic payments made to or by traders who are long or short based on the difference between perpetual contract markets and spot prices.

However, he identified the problem as degens paying very high funding rates: 

“ByBit degens, who, while sitting at nearly the same OI as Binance, were so leveraged long they were paying 40% annual funding rates.”

Find out more: What are Perpetual Futures Contracts in Cryptocurrency? 

Heavy one-sidedness on spot markets is fine, but for perpetual contracts, markets are designed to keep balanced, since one person’s short is another’s long, he explained. 

“This is why a healthy market *must* have liquidation days to continue to rise. Constant rising without downside, gets the market far too offside. There are too many winners and too much leverage.”

Sponsored
Sponsored

A Healthy Flushout 

In this case, ByBit users were liquidated but started re-opening positions to push OI back up. 

Moreover, these types of leverage flushes can be identified when Bitcoin or Ethereum price action is in the same category as altcoins

Previous flushouts. Source: X/@adamscochran
Previous flushouts. Source: X/@adamscochran

Cochran concluded that leverage flushes can be a blow-off that reverts a trend if there isn’t enough momentum left. However, “the harder the reset, the more momentum the trend can retake,” he added. 

BTC was trading at $41,869 at the time of writing. It was recovering from an intraday dip to $40,321 during late trading on Dec. 11.

Disclaimer

In adherence to the Trust Project guidelines, BeInCrypto is committed to unbiased, transparent reporting. This news article aims to provide accurate, timely information. However, readers are advised to verify facts independently and consult with a professional before making any decisions based on this content. Please note that our Terms and Conditions, Privacy Policy, and Disclaimers have been updated.