Cryptocurrency market witnesses massive leverage wipeout as Bitcoin plunges

The cryptocurrency market experienced a significant upheaval as Bitcoin, the leading digital asset, underwent a sudden and drastic price decline, wiping out billions of dollars in leverage. On March 5, Bitcoin plummeted by approximately 14% within a few hours, shortly after achieving a new all-time high. This sharp downturn left traders utilizing options and futures to gain exposure to Bitcoin out of pocket by a staggering $1 billion.

Bitcoin’s plunge leads to massive losses

Following a brief surge to a new peak of over $69,200, Bitcoin’s value swiftly plummeted, causing widespread repercussions across the cryptocurrency landscape. The decline in Bitcoin’s price triggered a cascade effect, resulting in substantial losses for traders engaged in leveraged positions. 

Open interest, a metric indicating the total amount of open positions on derivatives contracts, experienced a notable decline across major cryptocurrencies, including Bitcoin, Ethereum, and Solana.

The total open interest on exchanges for Bitcoin saw a significant decrease of $1.46 billion, equivalent to a 12% drop, in just a few hours. Similarly, Ethereum’s open interest plummeted by $967 million (-15%), while Solana experienced a decline of $424 million (-20%). This downturn in open interest reflects the extent of speculative trading activity surrounding the anticipated surge in Bitcoin’s price.

Speculative excess temporarily removed

Analysts from Santiment, an on-chain analytics provider, noted that most speculative activity leading up to Bitcoin’s all-time high involved traders opening long positions in anticipation of further price increases. 

However, the subsequent decline in Bitcoin’s price resulted in the liquidation of these long positions, temporarily removing speculative excess from the markets. Additionally, some flush-out stemmed from liquidating short positions as Bitcoin briefly touched a new all-time high.

Derivatives flush-outs: A normal market phenomenon

Despite the market turbulence induced by Bitcoin’s rapid price decline, experts emphasize that derivatives flush-outs are common in the cryptocurrency market. According to insights shared by renowned crypto trader ‘Daan Crypto Trades,’ the recent correction resulted in approximately $3 billion in open interest being lost. Data from Coinglass revealed that over 312,500 traders were liquidated, with total liquidations amounting to $1.13 billion within 24 hours.