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



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