Market Downturn and Investor Behavior
Bitcoin fell below $90,000 again today, reflecting investors' continued shift away from riskier assets. The largest cryptocurrency has fallen nearly 30% from its record high of $126,000 at the beginning of October, erasing all of its gains since the beginning of the year.
Market analysts attribute the decline in cryptocurrency asset prices to uncertainty surrounding the Federal Reserve's interest rate policy, combined with intense selling pressure from both institutional and individual investors. Yesterday's outflow of over half a billion dollars from BlackRock's iShares Bitcoin Trust fund served as a clear indication of the ETF's fragility, marking the fund's largest daily outflow since its inception.
Impact on Leveraged Trading
Bitcoin's sharp decline since its peak in early October has particularly challenged investors who had been using high leverage in anticipation of a recovery. With the price retreating to $89,500 today, interest in leveraged trading on offshore exchanges has sharply increased.
Open interest in Bitcoin perpetual futures contracts on platforms like Binance surged by over 36,000 Bitcoin last week. This increase, valued at over $3.3 billion, was the largest weekly jump since April. According to K33 Research, funding rates remain high, indicating that the market is still heavily long.
“Perp open interest has reached its October peak again. This systematically increases the risk of a squeeze.”
Vetle Lunde, Head of Research at K33 Research
During the price's rapid decline below $98,000, many traders placed limit orders to “buy the dip.” However, the price's continued decline triggered these orders, suddenly exposing investors to the market with real, leveraged positions. This led to speculation that the increased leveraged exposure, which occurred before the rally, made the market vulnerable.
Historical Context and Market Liquidity
The market turmoil began with the liquidation crash on October 10th, which wiped out more than $19 billion in leveraged positions in a single session. Since then, inflows into crypto ETFs have reversed, digital asset-focused companies have scaled back their buying, and institutional demand has weakened significantly. Many funds have fallen below their average inflow levels into Bitcoin.
K33 Research notes that Bitcoin experienced additional losses in six of the seven periods in which similar dynamics were observed in the past. The average monthly decline during these periods was around 15%.
Rails CEO Satraj Bambra stated, “The liquidation incident on October 10 created a serious liquidity gap in the market, which has still not been filled. There is insufficient new buyers entering the market; sellers outnumber buyers in the spot and derivative markets.”