Bitcoin futures contracts worth about $ 1 billion were once again deleted. Bitcoin (BTC) futures contracts worth about $ 1 billion were liquidated on January 13, a day after the big shake. The continuous liquidation cycle causes excessive volatility and massive price fluctuations in the cryptocurrency market.

 

What is a futures settlement and why are so many Bitcoin positions being liquidated?

In the Bitcoin futures market, traders borrow additional capital to bet against or for Bitcoin. The technical term for this is leverage, and when traders use high leverage, the liquidation threshold becomes tighter.


For example, if a trader borrows 10 times the initial capital, a 10% price move in the opposite direction will cause the position to be liquidated. When it is liquidated, the position becomes worthless and all of the initial capital is lost.

When Bitcoin saw a massive 25% drop from $ 41,000 to $ 30,500 on January 12, futures contracts of about $ 2 billion were liquidated.

However, a further $ 1 billion contract was liquidated within 24 hours. Still, there was no major price fluctuation outside of the $ 32,000 to $ 35,500 range.

The data show that many traders raised their positions to long-focused BTC after recovering from $ 30,500. Therefore, as Bitcoin rose to $ 35,500, many short contracts were liquidated.

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The gradual liquidation of short contracts is probably the main reason behind BTC’s rapid 20% relief rally from $ 30,500 to $ 35,500.

The market is less leveraged than the last two weeks. The futures funding rate moves between 0.01% and 0.05%, meaning that buyers still represent the majority of the market but do not dominate the market.

By comparison, the futures funding rate was consistently between 0.1% and 0.15% while Bitcoin was above $ 40,000. This means the market is crushed by buyers and overgrown traders.

Although undoubtedly excessive volatility is not conducive, the shaking of an overly leveraged market is a healthy situation and necessary for the continuation of the rally.

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