Massive leverage liquidation shocks Bitcoin: what does it mean for the price?

Author: Pedro Solimano Source: DLNews Translation: Shan Ouba, Golden Finance

Abstract

• The situation in the Middle East has tightened sharply, and traders are closing their leverage positions.
• Bitcoin briefly fell to a two-month low and has now rebounded slightly.
• In the past 24 hours, $420 million worth of trading positions were liquidated.

On Monday, in response to the sudden change in the Middle East situation, traders hurriedly “pulled the escape rope” to close their leveraged positions. The U.S. airstrikes on Iranian military facilities over the weekend caused a significant pullback in the cryptocurrency market, leading Bitcoin to briefly drop below $100,000, before slightly rebounding to $102,000.

According to data from CryptoQuant, when Bitcoin fell to a two-month low, the estimated leverage ratio (ELR) also experienced a significant drop. ELR measures how much leverage traders are using relative to the actual Bitcoin held by the exchange. It is an indicator that reflects market risk appetite, and a drastic decline indicates large-scale hedging behavior.

In other words, traders are actively closing high-leverage positions or are being liquidated. According to Coinglass, over $420 million in positions were liquidated in the past 24 hours, with more than two-thirds being long positions. This large-scale risk-averse behavior indicates that traders are wary of market volatility and are more inclined to flee the market rather than seek the potential gains from a rapid rebound in Bitcoin.

However, it is interesting to note that this phenomenon is contrary to the widely held belief among most Bitcoin supporters of “hedging against geopolitical shocks.” Currently, some traders are even building bearish positions on Bitcoin in the options market, betting that it may drop to $95,000 this week. In the Polymarket crypto market expectations, investors are similarly pessimistic about Bitcoin’s recent performance. Within a week, market expectations for Bitcoin reaching a new high in July have plummeted from 70% to 10%.

The current pessimism may be more of an overreaction rather than a complete loss of confidence. BitMEX co-founder Arthur Hayes stated that the current weakness of Bitcoin is only temporary and expects Bitcoin to reach $250,000 this year.

Although Bitcoin has rebounded, the market situation remains uncertain if the situation in the Middle East continues to deteriorate.

Jonathan de Wet, Chief Investment Officer of digital asset trading firm Zerocap, stated in an email: “The potential variable today and this week is the Strait of Hormuz, which is a key passage for about 20% of the world’s oil transportation. Once Iran blocks this passage, it may become a new test for Bitcoin’s ‘safe-haven properties.’”