The price of Bitcoin (BTC) fell by 11.5% from Aug. 16 to Aug. 18, resulting in $900 million worth of long positions being liquidated and causing the price to hit a two-month low. Before the drop, many traders expected a breakout in volatility that would push the price upward but this was obviously not the case. With the substantial liquidations, it’s important to address whether professional traders gained from the price crash.
Bitcoin just saw one of its largest daily liquidations by volume in history.
Starting at 4:30 PM yesterday, #Bitcoin fell 7.5% in 20 MINUTES, erasing $42 billion in market cap.
This mass-liquidation event involved more outflows in 1 day than during the FTX collapse in November… pic.twitter.com/KmVNkXoOLw
— The Kobeissi Letter (@KobeissiLetter) August 18, 2023
There’s a common belief among cryptocurrency traders that whales and market makers have an edge in predicting significant price shifts and that this allows them to gain the upper hand over retail traders. This notion holds some truth, as advanced quantitative trading software and strategically positioned servers come into play. However, this doesn’t make professional traders immune to substantial financial losses when the market gets shaky.
For larger-sized and professional traders, a majority of their positions may be fully hedged. Comparing these positions with previous trading days allows for estimations on whether recent movements anticipated a widespread correction in the cryptocurrency market.
Margin longs at Bitfinex and OKX were relatively high
Margin trading lets investors magnify their positions by borrowing stablecoins and using the funds to acquire more cryptocurrency. Conversely, traders who borrow Bitcoin employ the coins as collateral for short positions, indicating a bet on price decline.
Bitfinex margin traders are known for swiftly establishing position contracts of 10,000 BTC or greater, underscoring the involvement of whales and substantial arbitrage desks.
As depicted in the chart below, the Bitfinex margin long position on August 15 stood at 94,240 BTC, nearing its highest point in four months. This suggests that professional traders were entirely caught off guard by the abrupt BTC price crash.
Unlike futures contracts, the equilibrium between margin longs and shorts isn’t inherently balanced. A high margin lending ratio signifies a bullish market, while a low ratio suggests a bearish…