Bitcoin Is on a Bumpy Ride. Why Cryptos May Get Even More Volatile.
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Crypto prices have plunged in recent days.
Jack Guez/AFP via Getty Images
Bitcoin
has lost 30% of its value in just four days, exhibiting a level of volatility that the largest cryptocurrency is famous for—even if it hasn’t seen such wild swings in years.
And there are reasons to believe the bumpy ride could get even bumpier.
Action in the crypto derivatives market is exacerbating the selloff in Bitcoin and other tokens—many of which, including
Ether,
are performing worse than Bitcoin—while traders continue to position for more losses.
Trading in derivatives such as futures and options based on digital tokens represent the majority of all crypto trading. The volume of derivatives traded on exchanges in May was $3.2 trillion, compared with $2 trillion of tokens traded on exchanges, according to crypto data firm CryptoCompare.
Most—perhaps 99%—of this derivatives volume is in Bitcoin perpetual futures, which aren’t dissimilar from continuous contract futures for the likes of oil. Bitcoin “perps” are among the most liquid crypto instruments, according to Clara Medalie, the head of research at crypto data firm Kaiko; as such they are critical to Bitcoin price discovery and have a significant impact on the spot Bitcoin market.
One of the ways Bitcoin derivatives affect Bitcoin prices is through “liquidations.” Many traders use leverage, or borrowed money, to trade these instruments, and their positions on margin can be sold off in the blink of an eye if the value of their collateral—which is often Bitcoin—falls below a required level.
Liquidations bring down the price of derivatives contracts, which can drag down the price of Bitcoin in spot markets, which causes even more liquidations—it is a “vicious cycle,” Medalie said.
Intraday swings of 5% to 10% are regularly due to liquidations—and this is happening right now. More than $125 million in Bitcoin futures positions have been liquidated in the past 24 hours, according to crypto data firm Coinglass, which represents additional selling pressure on a downward market. Across the whole crypto derivatives space, more than 120,000 traders have been liquidated in the last day on positions worth more than $325 million.
“We may seek a quick pullback to $28,000-$30,000 if liquidations subside,” Samir Kerbage, the chief product and technology officer at digital asset manager Hashdex, wrote in a note, referring to Bitcoin prices.
“Bitcoin at $20,000 and Ether at $1,000 are the levels to watch,” Kerbage wrote. “If these psychologically meaningful levels are lost, we may see some significant fear in the market that may put more pressure on the short-term price action.”
Traders jockeying for position in the Bitcoin options market provide another indication that volatility may continue. The one-week implied volatility for at-the-money Bitcoin options is more than 130%—the highest in a year—Dylan LeClair, the head of market research at BTC Inc., said via Twitter, which he said is “pricing in an absolutely massive move.”
Moreover, an indicator for the relative expensiveness of Bitcoin call options—bets that the token will rose—versus put options, which are bets on declines, have priced in the most expensive puts in the history of the data, LeClair said.
“Funds and institutions [are] scrambling for downside protection late,” the analyst said.
Bitcoin traded down 5% over the past 24 hours to around $21,700, having fallen as low as $20,100 in the depths of Wednesday selling. Bitcoin was changing hands above $30,000 less than a week ago.
Write to Jack Denton at jack.denton@dowjones.com