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Examining leverage in the derivatives market, which can explain some recent bearish price action in bitcoin.
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Examining leverage in the derivatives market, which can explain some recent bearish price action in bitcoin.
The below is from a recent edition of the Deep Dive, Bitcoin Magazine's premium markets newsletter. To be among the first to receive these insights and other on-chain bitcoin market analysis straight to your inbox, subscribe now[2].
This week has seen some bearish price action for bitcoin, and what's the cause? One of the main catalysts is the leverage in the derivatives market.
When looking at the perpetual futures funding rate, we can see downturns in bitcoin price coupled with a reduction in funding rate from the highs. What this is showing is that the derivatives market bulls got ahead of the spot bitcoin market, and were speculating with leverage on a rise in price. If/when this rise in price does not come, these traders are caught offsides, and a leverage unwind occurs.
Below we can see the current state of the perpetual swaps bitcoin market, which shows mostly neutral positioning following the dip below $60,000: a classic shakeout.
One of the things that is so often misunderstood about the bitcoin market is that the price discovery and volatility that exists in the market is a way of shaking off any and all market participants that are overexposed/leveraged. Large buyers and sellers in the bitcoin spot market oftentimes closely follow the developments in the derivatives market, because they know that if the derivatives market finds itself offsides either to the upside or to the downside, a lot of money can be made by forcing
