- Over $275 Million in Bitcoin longs liquidated on BitMEX yesterday
- Bitcoin fell 12% in mere minutes creating a high volatility trading landscape.
According to Datamish, over $275 million in Bitcoin long positions were liquidated on BitMEX yesterday. BitMEX is one of the largest cryptocurrency and crypto derivatives trading platform. While crypto derivatives trading has been increasing exponentially in 2020, yesterday’s massive liquidation comes from Bitcoin plummeting over 12% in just minutes.
With Bitcoin rapidly falling over 12%, many long positions were liquidated just prior to the halving. This period of high volatility also affected major cryptocurrency exchanges like Coinbase, which experienced a partial outage as Bitcoin fell.
Longs and Shorts
Longs and shorts allow traders to leverage their trades in accordance with which way they believe the price will move. If traders believe the price will go up, they will open a long position. If traders believe the price will go down, they will open a short position.
BitMEX is one of the largest leveraging platforms that allow traders to open Bitcoin longs. Traders can open long positions by using their current funds to borrow additional funds which are then used to buy Bitcoin. In theory, once the price of Bitcoin goes up, traders can pay back what they borrowed and net the difference.
For example, a trader wants to open a 1 Bitcoin long with 5x leverage, worth $10,000 at the time of purchase. To fund the position, the trader funds 0.20 BTC ($2,000) from their wallet and borrows 0.80 BTC ($8,000) from the platform. If the price goes up to $20,000, the trader can pay back the $8,000 and net $10,000, excluding trading fees. This is calculated by ((Sold Value – (Initial Funds) – (Borrowed Funds+Fees)). Alternatively, if the trader decided not to borrow funds, their $2,000 investment would have doubled to $4,000, only netting the trader $2,000.
However, leveraging positions is also very risky. Using the same 1 Bitcoin long position with 5x leverage, traders will lose funds at 5x the rate if the price goes down. In other words, the losses will be magnified 5 times. For example, if the price falls 20%, the position will be liquidated and the trader’s initial 0.20 BTC will be used to pay off the loss in value for the borrowed funds. As a result, the trader lost $2,000, 5x the amount they would’ve lost if they did not borrow funds. Thus, it is crucial traders are adept at risk management when opening leveraged positions.
As Bitcoin fell rapidly yesterday, many long positions were liquidated. This was due to many traders opening positions with far higher leverage. For example, with a 20x leverage, a 5% movement downwards can result in the position being liquidated and the trader losing the whole position.
On the other hand, shorts allow traders to bet on the price of Bitcoin plummeting. If a trader wants to open a 1 BTC short position at $10,000, they will borrow 1 BTC at $10,000 and sell it at market value. If Bitcoin drops and the trader wants to close the position at $9,000, they will buy back 1 BTC with the $10,000 from the previous sale. The trader will then pay back the lender 1 BTC, and net $1,000.
However, shorting Bitcoin also comes with risks. In order to short Bitcoin, traders have to deposit margin collateral. If the trader is shorting with a 10x leverage they will only borrow 0.9 BTC and fund 0.1 BTC from their own wallet. Thus, if Bitcoin goes up, the losses will be magnified. If Bitcoin rises 10%, the trader will lose the entire position. As a result, like leveraging longs, shorts are also very risky.
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