Crypto-Crash Autopsy Shows Billions Erased in Flash Liquidations

(Bloomberg) -- Cryptocurrency markets are stabilizing after a $500 billion Bitcoin wipeout snuffed out a slew of speculative excesses that had been building for months.

Signals across the virtual-currency complex show leveraged positions are getting flushed out while dip-buyers are emerging -- helping fuel a return toward $40,000 for the world’s biggest token.

As the dust settles following the Wednesday crash, Bybt data shows liquidations have totaled roughly $10 billion since Wednesday. Outstanding futures contracts have tumbled from a $28 billion peak in April to just $13 billion Thursday.

The hundreds of billions of dollars changing hands across derivatives this week eclipsed activity in the cash market, as speculators rushed to close positions in the meltdown.

“The selloff was greatly exacerbated by a lot of leverage,” said Martin Green, chief executive officer at Cambrian Asset Management, a $150 million crypto fund. “Now that the excess leverage has been liquidated, we have seen longs and leverage starting to be placed once again.”

It all shows the power of crypto derivatives markets, where activity has exploded with the rise of multi-billion exchanges that cater to Wall Street and retail traders alike. The extreme volatility and big money in digital currencies is starting to draw regulatory attention, with the U.S. Treasury Department calling for stronger tax compliance within the space.

This year’s relentless boom has pushed the likes of Ethereum up as much as 2,200%, while Dogecoin -- a token created as a joke -- became as valuable as blue-chip American companies. Things went awry this week as Bitcoin slid toward $30,000, fueled by regulatory missives from China’s central bank while Tesla Inc. billionaire Elon Musk tempered his enthusiasm for the asset.

“You got all those bearish news and eventually you hit the point where a lot of the leveraged positions were getting liquidated,” said Justin d’Anethan, sales manager at EQUOS, a crypto exchange run by Diginex. “When that happens, it’s just a cascading fall.”

Volumes surged Wednesday across exchanges, many of which offer high leverage untethered by regulations. As of roughly 7 a.m. in New York, the largest crypto platform Binance had recorded nearly $200 billion in derivatives volume over the preceding 24 hours. At OKEx and Bybit, activity had more than doubled from the prior period.

To make things worse, the frenzy coincided with disruptions at Binance, Coinbase and Kraken, deepening panic across cryptoland.

Open interest in both options and futures stabilized on Wednesday afternoon in New York trading, as major investors from Cathie Wood to Justin Sun soothed nerves with bullish remarks.

On Deribit, the biggest crypto options exchange, a volatility index similar to the VIX dropped to 117 on Thursday from a high of 132 yesterday.

One signal in the futures market suggests things are beginning to stabilize.

Speculative bulls on Thursday are back trading perpetual crypto futures -- where no underlying asset is delivered -- to narrow their discount to the spot price. The spread, known as the funding rate, is typically at a premium during rallies amid strong demand to go long, but it plunged into negative territory yesterday.

“There is little question that the reports of margin calls and other forms of the ‘unwinding of leverage’ took place yesterday,” said Matt Maley, chief market strategist for Miller Tabak + Co. “The fact that they were all able to close well above their lows tells us that much of that ‘forced selling’ faded during the day.”

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