The Decline in Liquidation Sensitivity: A Reflection of a Maturing Crypto Market

The Decline in Liquidation Sensitivity: A Reflection of a Maturing Crypto Market

The cryptocurrency market is notorious for its volatility and constant fluctuations in prices. Over the years, it has experienced significant changes, particularly in how investors react to these price movements. While it may be evident that the market has become less volatile, a closer examination reveals a reduction in liquidations per percentage change in Bitcoin’s price. This decline in volatility can be attributed to a shift in investor behavior, primarily in the futures market.

To gain insights into how market participants respond to price movements, CryptoSlate has introduced the Liquidation Sensitivity Index (LSI). The LSI is calculated by dividing the total value of both long and short liquidations by the absolute value of the percentage change in Bitcoin’s price. A higher LSI indicates that smaller price movements result in more significant liquidations, indicating heightened market sensitivity. Glassnode data, which tracks crypto-native markets such as Binance, OKX, and ByBit derivatives trading, is utilized to calculate the LSI.

The Importance of Crypto-Native Markets

While it would be ideal to include traditional markets in the analysis of crypto derivatives, the historical data limitations restrict the focus of the LSI to crypto-native markets. It is essential to be aware that these exchanges historically dominated Bitcoin futures trading, although CME has gained considerable ground in recent months. To obtain a more holistic view of crypto derivatives, analyzing CME Open Interest could provide valuable insights.

Examining liquidation events in 2021 highlights the high sensitivity of the Bitcoin market to price changes. Throughout the year, the LSI values consistently indicated heightened market sensitivity. For instance, on January 29, 2021, a 14.24% price increase triggered long and short liquidations, resulting in a staggering $709.31 million in liquidations and an LSI of $49.81 million USD/%. This pattern of high sensitivity persisted, with the LSI peaking at $152 million USD/% on April 18, 2021, during a 14.31% price drop. Another significant event occurred on May 19, 2021, following Tesla’s decision to stop accepting Bitcoin, which caused wild price swings and a 28.2% decrease in price.

In contrast, the year 2023 paints a different picture of the market’s reaction to price changes. The sensitivity to price movements notably decreased, as seen on January 14, 2023, when a 7.33% price increase resulted in total liquidations of $145.84 million, translating to an LSI of $19.89 million USD/%. This trend of reduced sensitivity continued, with a similar scenario occurring on December 5, 2023, where a 5.17% price rise corresponded to an LSI of just $12.32 million USD/%.

A significant difference is observed when comparing the average LSI values for the respective years. In 2021, the average LSI was $74.27 million USD/%, whereas in 2023, it dropped to $18.93 million USD/%. This shift reflects a drastic $55 million (77%) reduction in liquidations per percentage point change in Bitcoin’s price since 2021.

As of today, December 11, the trend of decreasing liquidation sensitivity persists. With a 5% price change, the total liquidations on analyzed exchanges amount to $85.4 million, resulting in an LSI of $16.44 million USD/%. This value suggests that for every 1% change in Bitcoin’s price, the market reacts with approximately $16 million in liquidations.

Several factors can explain the decrease in liquidation sensitivity over time. The maturity of the cryptocurrency market, particularly Bitcoin, plays a crucial role. Investors and traders have adopted better risk management strategies, becoming less reactive to price changes. Additionally, the entry of more institutional investors and the development of more sophisticated trading tools has contributed to a more stable market environment. Notably, the rise of CME as the dominant futures trading platform in 2023, surpassing Binance, has influenced market dynamics.

The comparative analysis of Bitcoin’s liquidation sensitivity in 2021 and 2023 reveals a clear shift in market dynamics. The year 2023 demonstrates a lower value of liquidations per percentage point change in Bitcoin’s price compared to 2021. This change indicates a maturing market, potentially signaling a more stable and less speculative environment. These insights are invaluable for investors and traders, suggesting a shift towards a more resilient market in the face of price volatility.

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