Bitcoin Plunges Liquidating Millions In Bitcoin Longs
Quick Read
- Over $47 million in Bitcoin longs have been liquidated on BitMEX in the last 24-hours.
- Bitcoin options market gears up for another massive expiry.
After surpassing $12,000 for the second time this month, Bitcoin continues to plunge eyeing the $11,000 level. Bitcoin’s decline resulted in a massive wave of short liquidations. According to cryptometer.io, over $47 million in Bitcoin longs have been liquidated on BitMEX in the last 24-hours.
Bitcoin long positions allow traders to bet on Bitcoin’s price rising in the future. Some traders also utilize leverage trading which can amplify gains but also amplify losses at the same rate.
Leverage trading allows traders to leverage greater trading power. For example, to open a 1 Bitcoin position with 20x leverage, the trader only contributes 0.05 Bitcoin to the position and borrows the rest. By doing so, the trader has the trading power of one whole Bitcoin and, therefore, amplifies potential returns on the 0.05 Bitcoin by approximately 20x.
While leverage trading can help traders amplify gains, it can also amplify losses at the same rate. For example with 20x leverage, a 5% move in an opposite direction may result in liquidations and the trader losing their entire initial contribution to the position. Therefore, traders trading with large amounts of leverage may face liquidations during price fluctuations.
Bitcoin Options Market Gears Up For Another Massive Expiry
The Bitcoin options market is due for another large expiry towards the end of this month. Data from Skew, a cryptocurrency analytics platform, shows that over 49,000 Bitcoin worth of options are due to expire on August 28.
Bitcoin options allow buyers to buy or sell Bitcoin at a specified price (strike price) on or before the option’s expiry date. Traders can choose to purchase calls and puts.
Calls allow traders to purchase Bitcoin at a specific price, also known as the strike price. If Bitcoin rises above the strike price, traders can exercise the option and purchase Bitcoin at the strike price and net the difference between the spot price and strike price.
On the other hand, puts allow traders to sell Bitcoin at the strike price. If Bitcoin falls below the strike price, traders can exercise the option and sell Bitcoin at the strike price which is above the spot price.
Traders pay a specific price for the option, also known as the option premium. If the price action does not follow what the trader anticipated, they can decide not to exercise the option, therefore minimizing their downside to just the premium they paid for the option.
Cover image by Piotr Cichosz on Unsplash
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