Just woke up. WHO SOLD?
This was the first thought that crossed Reetika, a Dubai-based bitcoin (BTC) and crypto trader, during her usual routine of checking prices after waking up.
An unexpected and major sell-off in the crypto markets shocked what had been an otherwise uneventful few weeks for crypto and the sentiment was likely shared globally among traders and crypto hopefuls, Reetika told CoinDesk in a message.
Bitcoin collapsed on Thursday as traders sold off the tokens en masse based on several unrelated catalysts, causing the crypto markets to lose 6.7% in total capitalization in what marked one of the biggest declines in recent months.
In the past 24 hours, Bitcoin fell as much as 9% to $25,000 from $28,500 on Binance, sparking a market-wide decline that caused major tokens like Litecoin (LTC) to plummet by 14%. This caused more than $1 billion worth of crypto futures to be liquidated, a 14-month high.
Some orphans to space exploration company SpaceX’s supposed bitcoin sale — an unsubstantiated claim — while others said China Evergrande’s bankruptcy may have had something to do with the fall. However, none of these events could have affected prices.
SpaceX only wrote down the value of its bitcoin holdings, according to a WSJ report. For accountants, that is the reduction in the book value of an asset when its fair market value has fallen below its book value.
Asset depreciation is common in businesses as it lowers the value of any assets for tax purposes. As of the Asian morning hours on Friday, SpaceX has not confirmed or reported a sale of its bitcoin holdings. As such, it remains unknown how much bitcoin or crypto Elon Musk’s company owns.
Long squeeze and what actually happened
Professional traders say market structure and liquidations were a likely reason for the sudden drop rather than a single fundamental catalyst. The market was also relatively illiquid and flat, making conditions ripe for sudden moves.
“Possible decision in shades of gray tomorrow. We’ve seen BTC OI move up in position, favoring shorts,” Decentral Park Capital trader Lewis Harland said in a message to CoinDesk. “The break below $28,500 led to material volumes of longs being liquidated. This has been combined with spot sales for the date (probably anticipating further delays).
Open interest refers to the number of unsettled forward contracts for a financial asset. In a flat market, the rapid build-up of a significant number of futures positions sometimes causes prices to drop rapidly in the event of a major sell-off by an influential player.
That’s because as prices get lower, long traders have to sell their positions to avoid getting liquidated. This increases selling pressure, but at the same time creates an endless loop of falling prices and coverage of long positions.
Data shows that most of the long liquidations took place on crypto exchange OKX, accounting for almost 40% of the entire market.
However, some fundamental catalysts are rising interest rates in the US, as previously reported.
“U.S. interest rates are rising to multi-year highs. The 10-year yield has risen to a 15-year high. These are generally bearish risk assets,” Harland added. “If this bond sell-off continues, we could see continued negative price action in risky assets into the weekend.”
Elsewhere, analysts from on-chain data platform CryptoQuant told CoinDesk they expect sentiment to remain bearish in the coming days — citing higher funding rates from short traders or those who bet against prices.
Financing rates are periodic payments made by traders based on the difference between prices in the futures and spot markets. Depending on their open positions, traders will pay or receive money. The payments ensure that there are always participants on both sides of the trade.
High rates can lead to price volatility as traders are incentivized to be on one side of the market, increasing both futures and spot market movements.
Meanwhile, traders appear to be awaiting a Grayscale court ruling on the issuance of an exchange-traded fund (ETF), a ruling widely expected on Friday.
A federal appeals court will release its ruling on the pending Grayscale V. SEC case that would determine whether the U.S. Securities and Exchange Commission (SEC) was unreasonable in its repeated denial of Grayscale’s proposed bitcoin ETF. The ruling, in Grayscale’s favor, is expected to trigger a market-wide increase, while the opposite could shake markets further.
Omkar Godbole contributed reporting.
UPDATE (August 18, 08:22 UTC): Corrects the spelling of Evergrande in the sixth paragraph.