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How Over-Leveraged Derivatives Degens Caused Another Bitcoin Crash 

2 mins
Updated by Ciaran Lyons
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In Brief

  • 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.
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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

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.

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.”

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.

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Martin Young
Martin Young is a seasoned cryptocurrency journalist and editor with over 7 years of experience covering the latest news and trends in the digital asset space. He is passionate about making complex blockchain, fintech, and macroeconomics concepts understandable for mainstream audiences.   Martin has been featured in top finance, technology, and crypto publications including BeInCrypto, CoinTelegraph, NewsBTC, FX Empire, and Asia Times. His articles provide an in-depth analysis of...