Over $13 billion lost by leverage crypto traders in 2020

29 Dec, 2020 James Dice

The cryptocurrency market has significantly grown in the last year with most assets rallying to new high price levels. However, the growth has not eliminated the sector’s volatility, something that has contributed to leverage traders losing a significant amount. 

Data presented by cryptocurrency trading simulator - Crypto Parrot indicates that leverage cryptocurrency traders cumulatively have lost $13.47 billion on Bitfinex and BitMEX exchanges in 2020. A total of $9.26 billion worth of long positions and $4.21 billion worth of short positions has been liquidated. 

BitMEX has liquidated roughly $7.7 billion longs and $3.83 billion shorts. In comparison to Bitfinex with $1.55 billion longs and $374.55 million shorts liquidated. 

Leverage trading or margin trading refers to a method of trading assets using third party funds. Margin accounts allow traders to access large sums of capital, allowing them to leverage their positions. Overall, margin trading amplifies trading outcomes so that traders can realize larger profits on successful trades. This strategy carries more significant risk compared to trading on a regular spot exchange. 



Crypto sector bullish run leads to high liquidation 

The major liquidation occurred during a period when the cryptocurrency sector has made a turn towards the bullish run. The rally has been initiated by Bitcoin which hit its ATH on December 27, 2020, after briefly surpassing the $28,000 mark. 

During the last year, the most liquidated cryptocurrencies managed to break crucial resistance levels and consistently showed flashes of more gains leading to liquidations of short positions. Crypto shorting entails of betting against a certain asset’s value going up. Therefore, if a shorted asset price falls as anticipated by the position owner, they profit. However, with the significant surge in crypto markets this year, many traders have been forced to liquidate their short positions and lose their principal investment.

As highlighted, Bitcoin has led the crypto market rally, something that began with the impending mining reward halving that dominated market sentiment since Bitcoin bottomed out at $4,474 in mid-March. Furthermore, the cryptocurrency market decoupled from traditional markets in April amid the pandemic bolstering the bullish price expectations. Initially in March Bitcoin plummeted translating to a high liquidation amount. 

Most of the long liquidations also occurred in the first quarter of this year when Bitcoin witnessed a significant drop. As of February 15, 2020, the asset was trading at $10,361 and dropped by about 56.81% to $4,474 on March 13. In the wake of the pandemic, the cryptocurrency market witnessed short-term volatility which contributed to liquidations in the long positions.

The March decline in Bitcoin price was unexpected as it came in the wake of a black swan event. The asset’s value simultaneously plunged alongside stocks, gold, silver, and other legacy markets. However, gold, stocks, and Bitcoin recovered after central banks rolled out pandemic stimulus packages. With Bitcoin, it is premature to expect a similar movement from a black swan event. 

Why Ethereum positions lead in the liquidated amount

From the data, Ethereum holds the largest amount of liquidated assets on Bitfinex and most of it occurred towards the end of November as speculation mounted regarding the Ethereum Foundation reaching the threshold to roll out the highly anticipated ETH 2.0 upgrade. The speculation swayed most investors who reacted leading to high demand forcing the asset to spike in demand. The movement resulted in a new yearly high of $620 as of November 24th. 

Traders who were able to notice the bearish trend made profits. However, the asset value dropped from a high of $620 on November 24th to a low of $480 on November 26th causing another significant liquidation event. 

With the high liquidation amount, traders have attempted to avoid using excessive leverage when trading futures contracts. It exposes capital to unnecessary risk especially with some exchanges managing liquidations very aggressively. Therefore, most traders are relating to the insurance fund to avoid massive losses. However, an insurance fund alone does not mean more security for exchange traders but depends on how this risk is managed under extremely volatile conditions.


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James Dice

James 'Bunni' Dice's protean background includes cryptocurrency market analysis, data science, trading, technical writing. He is also interested in AI and automation solutions.

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