A Leverage Bomb in Cryptocurrency Pricing

June 3, 2020 11:25 AM
After a near USD 1,000 rally on bitcoin gains were lost in an instant
Crypto settled derivative platforms offering up to 150x leverage are making snap sell-offs or rallies, relatively common occurrences
Crytpo and Bitcoin Market Cap Story of Day






Crypto markets have stabilized after yesterday's snap sell-off. The Top 10 is in the range of -5 to -7% off this week's highs.


Just as quickly  we highlighted the health of the current crypto rally, the market aggressively dropped before a recovery yesterday. We once again feel as though liquidations on crypto-settled derivative exchanges were a significant contributor.

After a near USD 1,000 rally on bitcoin, those gains were lost in an instant yesterday morning. While spot exchanges made lows in the range of USD 9,200, some derivative exchanges, in particular BitMEX, saw their perpetual swaps trade as low as ~8,500. Notably, near-identical short liquidations occurred on Monday's move higher than did in yesterday's sell-off (chart).

Yesterday, we noted that the quick rush for leverage and then stabilization of margin rates etc, was a healthy sign for the current uptrend. We underestimated, however, how fast a, 'leverage bomb' could be embedded into crypto pricing that would ultimately create a cascading sell-off across markets. It was a very different experience watching BitMEX, that saw a near USD 2,000 sell-off and pricing jumping in USD 100 increments, to spot exchanges, which were far more orderly. The reality seems to be that the popularization of these crypto settled derivative platforms offering as much as 150x leverage are making these snap sell-offs or rallies, relatively common occurrences. We feel that a more comprehensive suite of derivatives focused on risk management and alpha over pure leverage, would diversify trader tool-kits and benefit the ecosystem. We will surely give more detail on that thought in future notes.

About the Author

FRNT Financial is a technology and sales layer that offers institutional and accredited investors access to various forms of exposure to crypto-assets. You can subscribe to FRNT Financial Morning Note at https://www.frnt.io/morningnote