Why did the price of bitcoin drop $10,000 yesterday?
Why did the price of bitcoin drop $10,000 yesterday? Why did the price of bitcoin drop $10,000 yesterday?

Why did the price of bitcoin drop $10,000 yesterday?

Yesterday was an overly exciting day in the bitcoin market. For the first time in its history, a country (El Salvador) adopted BTC as legal tender, bitcoin people organized a campaign to buy BTC

to celebrate El Salvador’s move – in a word – the markets were very optimistic when BTC was approaching $53,000. At some point, there was a decline, one of the deepest in the last few months.

What happened. No one knows for sure, although according to experts, the situation in the futures markets is largely to blame.

What is a futures market and how does it work?

A futures market is an auction market where parties agree to exchange (deliver) something (in this case, bitcoin) at a specific date in the future. In this case, traders exchange contracts representing BTC as the underlying asset, thus opening the way for many investment options and strategies.

One of these strategies is leveraging, in which a person offers their own funds as collateral and the exchange lends them a much larger amount. For example, if someone trades 1 BTC at 100X, by placing one bitcoin on the exchange, they can trade 100 “theoretical” bitcoins. So, with BTC at 100X leverage, they would receive 1 BTC profit when the price rises from $50,000 to $50,500.

However, if the price drops to a certain percentage, the exchange liquidates the position and keeps the funds deposited as collateral. In the case of 100X, all it takes is for the price of bitcoin to fall from $50,000 to $49,500 for a trader to lose his bitcoin.

How did growth-oriented futures traders “fix” bitcoin?

Based on the words of many experienced analysts, over-leveraged pro-growth positions caused the BTC price to fall. Such situations have happened

before and are likely to repeat in the future.

According to CryptoQuant data, the collapse of the bitcoin price could be caused by a rapid decline in open interest (number of contracts on the market).

<img width=”1024″ height=”480″ data-src=”https://bithub.pl/wp-content/uploads/2021/09/bitcoin-futures-cryptoquant-min-1024×480.jpg” alt=”bitcoin futures cryptoquant” src=”https://bithub.pl/wp-content/uploads/2021/09/bitcoin-futures-cryptoquant-min-1024×480.jpg 1024w, https://bithub.pl/wp-content/uploads/2021/09/bitcoin-futures-cryptoquant-min-300×141.jpg 300w, https://bithub.pl/wp-content/uploads/2021/09/bitcoin-futures-cryptoquant-min-768×360.jpg 768w, https://bithub.pl/wp-content/uploads/2021/09/bitcoin-futures-cryptoquant-min.jpg 1280w” />source: CryptoQuant

When traders get overconfident, they tend to take very bullish (or bearish) positions in the futures markets. A small change in the spot

market (where traders trade their own assets) can then trigger several liquidation orders. This in turn causes a kind of butterfly effect, where more and more people start selling to get out of their positions, causing even more liquidations.

Crypto VizArt, on-chain data analyst at CryptoQuant explains

:

“The volume of long liquidations in less than 1 hour can confirm that this price fluctuation was largely driven by the futures market. Given the massive decline in contracts, a significant number of highly leveraged positions (attributed to inexperienced players) are expected to be removed from the market.”

Sam Trabuco, CEO of Alameda Research, agrees with the above:

However, in response to Chris Dunn’s tweet, cryptocurrency analyst Willy Woo didn’t seem too convinced by

just such an argument:

Willy Woo believes bullish futures positions were not enough to cause such price declines, no matter how leveraged. However, any analysis requires interpretation.

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