Sunday, October 24, 2021
HomeNewsBitcoin’s Margin Effect: What’s Really Driving Volatility in BTC Markets?

Bitcoin’s Margin Effect: What’s Really Driving Volatility in BTC Markets?

After several days of heading toward market stabilization, cryptocurrency prices are back in the red.

The negative movement appears to have affected altcoins the most. At press time, all of the altcoins in CoinMarketCap’s list of largest cryptocurrencies by market capitalization were down roughly 30 percent. ETH was down nearly 11 percent, while Binance Coin (BNB) and Cardano (ADA) were both down by roughly 12 percent. Dogecoin (DOGE) was down roughly 9 percent; XRP was down 13 percent, and PolkatDot (DOT) and Internet Computer (ICP) were both down around 9.5 percent.

Looking Forward to Meeting You at iFX EXPO Dubai May 2021 – Making It Happen!

Bitcoin’s (BTC) loss was slightly less severe, with BTC down 8 percent in the last 24 hours. While the drop pales in comparison to the price cuts we saw in Bitcoin markets last week, it has shaved off quite a bit of the progress that Bitcoin has made toward its recovery over the past week.

As the week comes to a close, BTC’s next moves could determine much about its future. Earlier this week, crypto market analyst, TraderKoz said that if BTC can hold the $37,000 support line over the weekend, its chances of regaining the $42,000 resistance level will grow. However, this latest drop has brought BTC to roughly $36K, and the 24-hour trend does not look too optimistic.

This most recent price drop in BTC markets seems to indicate that Bitcoin could be entering a bear market. While many crypto analysts are bullish on Bitcoin’s long-term trajectory, this drop could be an indication that Bitcoin has some more correcting to do before it can build enough meaningful support for another rally.

What’s causing this prolonged Bitcoin dip?

Is Margin Trading the Real Reason for Bitcoin’s Market Volatility?

While the main narrative around why crypto markets have been dropping over the past weeks has centered around negative news from the Chinese government as well as the announcement that Tesla would no longer be accepting Bitcoin payments. However, there is a third factor that is not quite as visible.

Indeed, Elon Musk and the Chinese government certainly have some effect on the price of Bitcoin. However, many analysts believe that the real driver behind last week’s crash was leverage.

CNBC reported that: “traders taking excessive risk in unregulated cryptocurrency markets” were forced to sell when prices started to drop. Therefore, what may have been a minor correction in the price of Bitcoin spiralled into a price drop of roughly 30 percent.

How does leverage trading, or ’margin trading’, work? Essentially, traders borrow cash from an exchange or brokerage firm that allows them to take a larger position in Bitcoin than their holdings would ordinarily allow. If BTC prices suddenly drop, traders have to pay the brokerage back. This is called a ’margin call’. Before traders reach that point, there are sometimes a set of sell triggers in place to make sure that traders can repay their debt.

Margin trading is not unique to Bitcoin or cryptocurrency more generally; it can be practiced across capital markets. However, what is unique about Bitcoin and cryptocurrency is the fact that margin trading is so unregulated.

Crypto Lending May Also Have Exacerbated the Effect of BTC Price Movements

In addition to margin trading, some analysts believe that the crypto lending industry may have played a role in the market crash of last week.

CNBC reported that crypto companies like BlockFi and Celsius, which offer interest-bearing crypto accounts, lend bitcoin out to hedge funds and other professional traders. However, they also allow lenders to use their bitcoin holdings as collateral for cash loans, which they may then use to buy even more Bitcoin.

However, this can lead to problems. CNBC explained that: “for example, if someone took out a $1 million loan backed by bitcoin and the price drops by 30%, they may owe 30% more to the lender.”

In order to protect themselves, some of these lenders have automatic sell triggers on their lenders’ collateral. Brian Kelly told CNBC that: “[When] you hit a certain collateral level, [lending] firms will automatically sell your bitcoin and send the collateral to the lender.”

“This adds to the massive cascade effect — there was so much volume that most of the exchanges broke.”

What do you think of the effect of leveraged trading and crypto lending on the price movements in Bitcoin this and last week? Let us know in the comments below.

RELATED ARTICLES

Most Popular