In a recent turn of events, the cryptocurrency market has seen a significant downturn, with a staggering $100 billion being wiped out in less than 24 hours.
Despite the alarming figures, industry analysts are asserting that such flash crashes and market washouts are becoming increasingly common and, in some cases, necessary for the health of the market.
Crypto market Normalcy in 5% corrections
The total crypto market capitalization has plummeted from a 21-month high of $1.82 trillion to approximately $1.71 trillion. While this may appear as a substantial loss, it’s worth noting that 5% market corrections are now regarded as normal occurrences in the digital asset markets. This is particularly relevant in a landscape where leverage plays a significant role in trading activities.
Technical analyst ‘CrediBULL Crypto’ noted that the market’s funding rates had already returned to baseline levels before the recent drop. Funding rates represent the fees paid by traders to maintain leveraged positions, and when they decrease, it indicates a reduced appetite for leverage.
Furthermore, open interest, which signifies the number of open, unsettled contracts, had been declining before the market downturn.
While there were some liquidations associated with the market drop, these were considered average and not indicative of an overheated or overleveraged market. In essence, the recent correction is seen as a healthy and necessary adjustment for the crypto market.
The role of long positions and leveraged trading
Data from Coinglass revealed that there were nearly $700 million in liquidations over the past 24 hours, with approximately 85% of them being long positions, predominantly involving Bitcoin (BTC).
Analyst Willy Woo observed that long demand in the system was becoming excessively high, leading to what is known as a “basis trade.” This strategy involves buying spot BTC while simultaneously shorting perpetual futures to collect the funding rate paid by bullish speculators.
This type of leverage flushout occurred earlier in December as well, with analysts attributing it to “over-leveraged derivatives degens.” It emphasizes the volatility and risk inherent in leveraged trading, which can amplify market movements.
Rumors and speculation on SEC’s role
Some have speculated that the recent crypto crash might be linked to a report suggesting that the U.S. Securities and Exchange Commission (SEC) would not approve any spot Bitcoin exchange-traded funds (ETFs) in the near term.
However, industry experts maintain optimism, anticipating a batch of ETF approvals by January 10, which marks the first deadline for the Ark 21 Shares Exchange Traded Product (ETP).
Despite the market’s resilience and the anticipation of ETF approvals, concerns loom over potential SEC rejections, which could lead to Bitcoin prices retreating to the $30,000 range.
At the time of this report, the cryptocurrency markets have shown signs of stabilization. Bitcoin (BTC) is trading at $43,197, while Ethereum (ETH) is changing hands for $2,291.
