Tonight there was a strong pump of Bitcoin, the price for spot, futures markets and various exchanges reached 40 – 48 thousand dollars.
At a time when the majority in the market was in short positions and almost all traders expected the price to drop to $ 24,000, the market turned around and went against the majority.
According to CryptoQuant, in just 3 hours, positions worth 3,280 BTC were liquidated during this pump, which is about $ 3,280 * 38,000 = $ 124,640,000. According to general data, during the last growth, the liquidation rate was more than $ 1 billion.
Let’s try to understand the example of Binance, why there is such a difference between the spot market, where the price rose to 40 thousand dollars and the futures market, where the price rose to 48 thousand dollars.
Below you can see the difference between these markets in more detail.
Binance Exchange, spot market chart 👉
Binance Exchange, futures market chart 👉
Why is there such a huge difference between these charts?
The whole point is that in the futures market you can leverage to 120x
What is leverage?
Leverage is the conventional name for a loan that people take on the exchange and pledge their own money as collateral.
Let’s have a closer look at how leverage works, for example, a trader at the exchange took 10x leverage on his capital, and bet that the price will rise, i.e., if he had $1,000 – this means that his capital would increase 10 times to $10,000. If after the trader takes leverage, the price goes up, that is, in the direction on which the trader bet, even if by 10%, he will earn 10% of $ 10,000, namely $ 1 thousand, thereby increasing his capital by 2 times. But if the price goes down, the trader will lose 10 times the price movement, 1% of the movement down = 10%, so if the price goes down by 10%, all the capital will be liquidated.
That’s the whole point of the futures market, you can make a lot more money if you know what you’re doing, and at the same time you can lose just as much.
Now back to the question, why was there such a difference in price?
The thing is that a large percentage of traders put on short positions. At the time the price had risen quite strongly, stop losses and liquidations of traders with large leverage began to trigger. At the moment when the stop losses or liquidations are triggered, the short positions are automatically closed, and these orders are bought back on the market (automatic buying), which actually led to such a strong growth.
After these events the founder of the Binance exchange wrote in his Twitter that the exchange reduced the possibility to use the leverage up to 20x for new users, and is going to gradually reduce this figure for existing users.