Bitcoin (BTC) futures contracts were terminated at nearly $ 1 billion on January 13, the day after the major turmoil. The continuous liquidation cycle leads to high volatility and large price fluctuations in the cryptocurrency market.

What is a futures liquidation, and why are so many bitcoin positions liquidated?
In the bitcoin futures market, traders borrow additional capital to bet on or for bitcoin. The technical term for this is financial leverage, and when traders use high leverage, the liquidation threshold becomes narrower.

For example, if a trader borrows 10 times the initial capital, a 10% price movement in the opposite direction will liquidate the position. After liquidation, the position becomes useless and all start-up capital is lost.

When Bitcoin fell 20% from $ 41,000 to $ 30,500 on January 12, nearly $ 2 billion in futures contracts were settled.

But within a day, several billion dollar contracts were terminated. However, there were no significant price fluctuations other than $ 32,000 to $ 35,500.

The data shows that many traders extended their positions to selling bitcoin after it recovered from $ 30,500. Therefore, when Bitcoin increased to $ 35,500, many of the short contracts were terminated.

The cascading settlement of short-term contracts is likely the main reason for the rapid 20% increase in BTC from $ 30,500 to $ 35,500.

The market is less used compared to the last two weeks. The funding ratio for futures contracts fluctuates between 0.01% and 0.05%, which means that buyers still make up the majority of the market, but do not control it.

In comparison, when Bitcoin was above $ 40,000, forward funding rates remained steady between 0.1% and 0.15%. This meant that the market was crowded with overly influential buyers and traders.

“Healthy” vibration
While extreme volatility is unfavorable, it is both beneficial and important to shake the over-indebted market for continued growth.

If the Bitcoin market continues to be overused by more than $ 40K, it risks a much larger correction of 25%.

In previous bull markets, Bitcoin has often seen a 30% to 40% retracement, so the recent decline from $ 42,000 to nearly $ 30,000 is not uncommon in a bullish BTC market.

Additionally, as a trader under a pseudonym known as “The Byzantine General” noted, the $ 30,000 area became the most important level of support.

The cooling of the Bitcoin futures market with the strengthening of $ 30K as support area is very optimistic about BTC’s future prospects.

Whale populations also set a $ 30,000 level to support whale pooling, meaning that this psychological level would definitely be protected by bulls if the price was facing south.

Source: CoinTelegraph