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Over US$13 billion lost by leverage crypto traders in 2020
Volatility of digital currencies sees many investors liquidating positions
30 Dec 2020 | The Asset

Many investors were astonished when Bitcoin surged past US$20,000 for the first time on December 16 – and continued to rise – from a low point of about US$5,000 in mid-March. While those holding the digital money in their portfolios rejoiced, the volatility of cryptocurrencies has also seen many falling by the wayside.

According to cryptocurrency trading simulator Crypto Parrot, data indicate that leverage traders on the Bitfinex and BitMEX exchanges have cumulatively lost US$13.47 billion in 2020.

A total of US$9.26 billion worth of long positions and US$4.21 billion in short positions have been liquidated over the last 360 days. BitMEX has seen roughly US$7.7 billion longs and US$3.83 billion shorts liquidated, while US$1.55 billion longs and US$374.55 million shorts have been liquidated on Bitfinex.

Crypto Parrot attributes the high liquidation value to Bitcoin’s price movement, which has affected the rest of the cryptocurrency market. “The March decline in Bitcoin price was unexpected as it came in the wake of a black swan event,” says Crypto Parrot data analyst James Dice, referring to the Covid-19 pandemic.

“The asset’s value simultaneously plunged alongside stocks, gold, silver, and other legacy markets. However, gold, stocks, and Bitcoin recovered after central banks rolled out pandemic stimulus packages.”

This suggests that the traders liquidated long positions after the cryptocurrencies fell against their expectations and abandoned shorts after the assets rose.  

 
Margin trading liquidations on BitMEX and Bitfinex in 2020
Infogram

 

The major liquidation occurred during a period when the cryptocurrency sector has made a turn towards a bullish run. The rally has been initiated by Bitcoin which hit its all-time high on December 27, after briefly surpassing the US$28,000 mark.

In 2020, “the most liquidated cryptocurrencies managed to break crucial resistance levels and consistently showed flashes of more gains leading to liquidations of short positions”, says Dice.

“With the significant surge in crypto markets this year, many traders have been forced to liquidate their short positions and lose their principal investment.”

On the other hand, most of the long liquidations occurred in the first quarter of this year when Bitcoin witnessed a significant drop. As of February 15, the asset was trading at US$10,361 and dropped by about 56.81% to US$4,474 on March 13, Dice notes.

In the wake of the pandemic, the cryptocurrency market witnessed short-term volatility which contributed to liquidations in the long positions.

Ethereum accounted for the largest amount of liquidated assets on Bitfinex. According to Crypto Carrot, most of the liquidation occurred towards the end of November as “speculation mounted regarding the Ethereum Foundation reaching the threshold to roll out the highly anticipated ETH 2.0 upgrade”.

The speculation led to a spike in demand. Traders who were able to notice the bearish trend made profits. However, the asset value dropped from a high of US$620 on November 24 to a low of US$480 on November 26, triggering another significant liquidation event.

Dice notes: “With the high liquidation amount, traders have attempted to avoid using excessive leverage when trading futures contracts. It exposes capital to unnecessary risk especially with some exchanges managing liquidations very aggressively. Therefore, most traders are relating to the insurance fund to avoid massive losses.

“However, an insurance fund alone does not mean more security for exchange traders but depends on how this risk is managed under extremely volatile conditions.”