Over the course of 2021, we became quite accustomed to the ‘leverage flush out’. These are de-leveraging events where too many traders, bet too big on the wrong outcome.
Think about every punter going mega-long with 100x leverage…at the top.
What follows is the market trading down, hitting their stop-loss or liquidation price, and they are FORCED to sell by the exchange. This creates even more sell-pressure, which hits the next guys stop-loss, and the cascade continues.
This is how we get the major sell-off events where Futures open interest drops like a stone, and the candle ends up wiping out $10k in a few days.
Note, this can also happen in a short squeeze, and push prices higher, although these are less common.
We can see these deleveraging events in the futures OI chart below where there are vertical drops in total open interest, indicating traders were closed out…against their will. Note: These OI charts are denominated in BTC, which removes coin price influence, and allows us to observe periods of RISING and FALLING leverage.
Now the current market is much healthier. See how the OI is closing out in a slower, steadier and more of a ‘waterfall’ like manner, than a ‘falling knife’. This is a result of traders CHOOSING to close their positions, rather than the exchange closing it for them.
Traders are de-risking and this is GOOD FOR BITCOIN. Clearly the world is in a pickle right now, and people opting to be cautious is a very sane response.
Common sense is more bullish than bearish. Again, probably have months of sideways ahead, but this is a really good sign and I am glad to see it.
P.S. In case you missed it, I highly recommend reading this week’s Glassnode newsletter. We cover the details of how derivatives markets have impacted the spot markets during a bear, and even I learned a tonne writing it.
https://insights.glassnode.com/the-week-onchain-week-07-2022/