After flirting with a $ 2 trillion market cap for the past few days, the crypto market took a 7% hit on April 7, bringing the total crypto market capitalization down to $ 1.8 trillion. As the unexpected sell-off occurred, investors were quick to find a reason to explain the move.
Analysts often identify the use of excessive leverage as the main suspect, as this usually occurs when the market reaches an all-time high and traders become greedy, but this is an easy conclusion to reach.
The actual cause could be nearly impossible to determine. Still, a starting point is to analyze the level of leverage of buyers compared to previous weeks. Analysts must also question whether a $ 1 billion sell-off is even meaningful in the current bullish environment.
Leverage amplifies price movements on both sides
Total capitalization of the cryptocurrency market. Source: TradingView
The negative price swing on April 7 resembles the rally that took place two days earlier. However, retail traders deploy leverage through the use of perpetual futures contracts (reverse swaps), which can amplify price corrections.
A 5% move is enough to liquidate traders with 20x leverage, and the exchange order books tend to thin below that level as traders rarely have orders in effect.
ADA) USDT order book. Source: Binance
As shown above, there is $ 4.6 million in bids up to $ 1.15 for Cardano’s ADA in the example above. Behind the 5% threshold, there is only $ 1.9 million down to $ 1.06, or 12% below the last trade.
Thin order books are a gold mine for resellers and arbitration desks. Once retail markets enter highly leveraged positions, there are multiple incentives to lower the price and trigger sell-offs.
Aggregate settlements. Source: Bybt
Today’s 12-hour, $ 1.4 billion sell-off may seem excessive, but this adds up all the futures markets. Furthermore, this represents only 3% of the total $ 46 billion in open interest. If this movement had taken place about six months ago, the figure would have been above 12%.
However, hinting that the sell-offs triggered the slide is not the best answer, as they are only triggered when markets are down 4% or more. Although analysts may never fully understand what triggered the correction, a “buy the rumor, sell the news” event could have taken place after Coinbase released its quarterly earnings.
The financing rate is high but not abnormal.
It is also important to review how high the funding rate was and, more importantly, for how long. Even if the eight hour rate reaches 0.20%, equivalent to 4.3% per week, this will not force longs to close positions.
8 hour funding rate of perpetual BTC futures. Source: Coinalyze
As shown above, the average financing rate on the major exchanges did not rise above 0.10%, which is substantially lower than the levels at the end of February.
It is natural during rallies for long traders to enter excessively leveraged positions, and this situation can last from a couple of hours to weeks.
Retailers are sometimes easy ducks
Whales and market makers probably knew that exchange order portfolios were in short supply and that retail traders were excessively leveraged. Therefore, it cannot be ruled out that today’s price action is a premeditated maneuver.
However, arbitrage between exchanges and futures markets occurs almost instantly, so there is no trace left. Analysts and experts can point to numerous reasons for today’s move, but the available data suggests that leverage itself is not the culprit.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trade movement involves risk. You should do your own research when making a decision.