The Daily Dive #110 - Leveraged Long Liquidations

Futures Open Interest Falls by 83K BTC

Almost immediately after we released our November Monthly Report last Friday, the bitcoin market experienced a series of swift liquidations taking price down to a potential bottom around $42,000. 

We highlighted the increased risk of the overextended total futures open interest and long liquidations in the monthly report saying, 

“The bitcoin total futures open interest in the derivatives market has risen to new elevated levels that have historically preempted increased healthy, liquidation flushes in the market. Although futures open interest is elevated largely because of increased CME Futures ETF demand, the rise is still cause for concern as perpetual funding rates rise higher as price is falling. These dynamics usually signal a derivatives market reset and thus a lower bitcoin price.” 

In a sharp drawdown, aggregate futures open interest fell from 411.7k BTC to 328.6k (BTC-denominated).  

Crypto-margined derivatives open interest witnessed a drawdown to its 2021 lows with the long liquidations, falling by more than 20,000 BTC in mere hours. 

In particular, open interest on Bybit saw massive liquidations. We highlighted Bybit open interest and derivatives in particular in the monthly report published to paying subscribers on Friday. 

Funding on perpetual futures also went steeply negative for the first time in months as the price was driven far below that of spot markets due to the cascading liquidations. The funding rate on “perps” can be thought of as a tether to the spot index, and when a large amount of liquidations occur due to excessive leverage, funding goes negative due the price of “perps” going far below that of spot indexes. 

Lastly, the futures exchange leverage ratio takes the open interest of all futures and derivatives contracts and divides it by the underlying bitcoin balance on said exchanges. Steep drawdowns in the leverage ratio are liquidations occurring, both long and short, displayed with red and green highlights below respectively.

Final Note

The rising and falling of leverage impacting price is a market dynamic bitcoin has seen many times. As presented in the latest monthly report and outlined in previous daily dives, the current on-chain data and our analysis signals a neutral to bullish market despite the near-term derivatives market action to the downside. 

Yet, after a cautious November and rising macroeconomic risks heading into December, the probability for a parabolic Q4 move continues to diminish. Without seeing significant changes in on-chain behavior, especially those of long-term holders who still make up 70.6% of circulating supply, we’re still expecting more upside for bitcoin that can extend into Q1. To reverse this outlook, we would either have to see a continued sell-off of long-term holder supply into lower bitcoin prices, or a slowdown in new adoption with decreasing trend of new entrant demand.