Bitcoin has had a roller coaster of a week, climbing to almost $60,000 over the weekend before plummeting on Monday.
The bitcoin price fell as low as $44,850 per bitcoin on the Luxembourg-based Bitstamp exchange, down 20% from its peak, before somewhat rebounding on the news Jack Dorsey’s payments company Square
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Traders and analysts have been scrambling to explain bitcoin’s sudden price downturn, with data revealing a record liquidation of highly-leveraged bitcoin futures contracts ignited a “tinderbox,” causing panic to spread through the market.
“The bitcoin market was like a tinderbox waiting for a spark,” cryptocurrency trader and author Glen Goodman says via Twitter DM, pointing to bearish comments from Tesla
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The combined value of the 18.5 million bitcoin tokens in circulation crossed $1 trillion for the first time last week before the sell-off wiped around $100 billion from the market.
“Traders had borrowed huge sums of money to buy bitcoin futures contracts, betting that the bitcoin price would continue to go up,” says Goodman.
When the bitcoin price dropped following Musk’s comments, some $1.68 billion worth of bitcoin futures were liquidated on Monday, according to cryptocurrency market analysts at Arcane Research using data from Bybt.
When traders borrow to go “long” on bitcoin futures, betting the price will rise, it pushes up interest rates on bitcoin and cryptocurrency exchanges, Goodman explained.
“Their interest payments on that borrowing skyrocketed,” he said. “On Saturday, the annual rate reached 144% per year on the largest crypto exchange, Binance. Clearly that is unsustainable, so the market was ready for a spark to tank the price and blow up the trading accounts of those who’d borrowed too much. That way the interest rate on borrowing could return to normal.”
Looking ahead, it’s thought bitcoin price could remain depressed for some time after this week’s set back.
“I would not be surprised if we range for a while,” says Bendik Norheim Schei, head of research at Arcane Research, speaking via Twitter DM. “Many got punished hard this week and the market may need some time to recover.”
“Interest rates are back to normal now so the pressure valves have been completely released,” added Goodman. “There’s no technical reason for the selling to continue, but once fear has set in, anything can happen. It all depends on how many bitcoin holders continue to panic and how many manage to hold their nerve.”