26 November 2020
Following a non-stop Bitcoin rally since the start of October when Bitcoin was trading at $10,500, the first significant retracement has taken place as Bitcoin was inching close to its ~$20,000 all-time high price.
- BTC: -14% drop from $18,900 to $16,300
- ETH: -17% drop from $575 to $480
- XRP: -28% drop from $0.65 to $0.47
This move to the downside occurred when the greed index was at an extreme level of 93/100, which meant a lot of market participants were over-exposed and over-leveraged. This caused a massive round of liquidations on crypto-exchanges to the tune of $1,400,000,000 (the Total Open Interest was at ~$10.5B).
From the institutional futures side, on the Chicago Mercantile Exchange (CME), the liquidations announced until now did not exceed $80 million and the open interest remains just under all-time highs.
One Decentralised Finance (DeFi), protocol: Compound, experienced its fair share of liquidations too: over $100,000,000.
What caused it seems to be an oracle attack which brought up DAI’s price on Coinbase all the way up to $1.3 when it should be pegged to $1 (DAI is a USD-pegged stablecoin). An oracle attack is simply a malicious party looking to purposefully manipulate prices in order to trigger liquidations.
Impact of Liquidations
Futures have attracted a very large and significant amount of capital into the cryptocurrency markets since their introduction. The other side of the coin though is not as positive because with liquidations comes excessive price moves.
As price began falling down from selling pressure, over-leveraged long positions begin to get liquidated. What happens is these longs must be closed with sell orders on the market, adding to the “already there” selling pressure, pushing the price even lower, creating deeper wicks and liquidating more positions.