After a brief recovery from the last two week’s bloodbath, the crypto market turns mixed.
This week, the bitcoin price dipped 2.9% to just over $20,100. Ethereum’s price
While the crypto market has shown some renewed vigor in recent days, the relief comes too late for many crypto traders. Recent data shows that the bear market has liquidated hundreds of thousands of leveraged positions in the past few weeks.
In an interview with Yahoo Finance, Rick Rieder, CIO of global fixed income at Blackrock, suggested this deleveraging is contributing greatly to the massive drop in the price of bitcoin and other cryptocurrencies.
“When you leave rates at such low levels for such an extensive period of time … when you keep policy too easy, the leverage builds in the system slash ‘how do I capture return quickly’ — and you are seeing a lot of the leverage that was built up around crypto come unglued pretty darn quickly,” he said.
[Ed note: Investing in crypto is highly speculative and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment.]
Leveraged trading is a practice that allows traders to play the market with borrowed money in order to jack up returns. The problem comes when the value of leveraged securities falls below a certain level, known as the maintenance margin.
When this happens traders are subject to what’s known as a margin call. It forces the trader to add more funds and cover potential losses. If the call isn’t quickly met, the broker takes the liberty of liquidating leveraged positions.
This leaves the trader holding nothing but the debt they incurred on their leveraged positions.
On a higher scale, such deleveraging is often the cause of a sudden and brutal drop in asset prices. Liquidations cause the falling price to feed back on itself. More and more margin calls come in and more assets are sold, sending the price into a tailspin.
This is what’s likely rubbed salt into the crypto wound during the recent rout.
In a recent tweet, crypto broker Cumberland suggested that it saw a record volume of liquidations on June 13. “The flow ratio suggests a lot of the flow was liquidations, with a 2:1 ratio of sellers to buyers,” Cumberland tweeted. In fact, Coinglass data shows that June 13 saw over $600 million in liquidations, the biggest daily wipeout since March.
That didn’t surprise Rieder who sees deleveraging as a natural market cleansing mechanism after extensive periods of easy money and greed. He thinks we saw a similar washout during the bursting of the dot-com bubble:
“It’s not terribly dissimilar from the internet bubble … if you go back to the ’99 and 2000, was the internet a bad idea? No, it wasn’t a bad idea. But you created so much excess around it and you just have to de-gear that dynamic, and I think we are seeing that today.”
Like many asset managers, Rieder believes that this deleveraging will turn out for the better. While it can be devastating to over-extended traders, in the end, it will cleanse the market of dodgy assets and open a new chapter for sustainable innovation.
“I still think bitcoin and crypto are durable assets. It’s a durable business, but there was so much excess built around it. I think there’s a healthy recalibration going on. It’s a question of how much that recalibration is going to go,” said Rieder in the interview.
So, Rick, should we buy the dip?
“My sense is like a lot of assets, if you look two to three years hence, they will be higher than today.”
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