Bitcoin: Crashes driven by big margin bets, new crypto banking
When traders use margin, they essentially borrow from their brokerage firm to take a bigger position in bitcoin. If prices go down, they have to pay the brokerage firm back in what’s known as a “margin call.” As part of that, there’s often a set price that triggers selling in order to make sure traders can pay the exchange back.
Brian Kelly, CEO of BKCM, pointed to firms in Asia such as BitMEX allowing 100-to-1 leverage for cryptocurrency trades. Robinhood does not allow traders to use margin for cryptocurrency, and Coinbase only allows it for professional traders.
“You get this crowd factor — everybody’s liquidation price tends to be somewhat near everyone else’s– when you hit that, all of these automatic sell orders come in, and the price just cascades down,” Kelly, told CNBC.
Bitcoin traders liquidated roughly $12 billion in levered positions last week as the price of the cryptocurrency spiraled, according to bybt.com. This mass exodus wiped out about 800,000 crypto accounts.
“Selling begets more selling until you come to an equilibrium on leverage in the system,” said JMP analyst Devin Ryan. That selling begins to “compound” as leveraged positions are liquidated, because they can’t meet those margin requirements, he said.
“Leverage in the crypto markets — particularly on the retail side — has been a big theme that accentuates the volatility,” Ryan added.
As the crypto market expands, Ryan said he expects leverage to become less of an influence, especially as more institutional capital comes in.
Investors, both retail and institutional, have poured into bitcoin and other digital assets in 2021. The world’s largest cryptocurrency exchange — Coinbase — said trading volume in the first quarter of the year was $335 billion, of which approximately $120 billion was retail and $215 billion was institutional. Trading volumes totaled about $30 billion in the first quarter of 2020.
Mark Cuban weighed in on the leverage aspect for ether, the world’s second largest cryptocurrency, on
Twitter last week.
“De-Levered Markets get crushed. Doesn’t matter what the asset is. Stocks. Crypto. Debt. Houses. They bring forced liquidations and lower prices. But crypto has the same problem that [high-frequency traders] bring to stocks, front-running is legal, as gas fees introduce latency that can be gamed,” Cuban said in a tweet last week.
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