Spot Markets, Not Leverage, Fuel Bitcoin's Price Rally Amid Mild Derivative Liquidations

Derivatives' role in bitcoin's rally is "muted" this time, said one trader.

AccessTimeIconNov 6, 2020 at 6:51 p.m. UTC
Updated Mar 6, 2023 at 2:49 p.m. UTC
10 Years of Decentralizing the Future
May 29-31, 2024 - Austin, TexasThe biggest and most established global hub for everything crypto, blockchain and Web3.Register Now

Red-hot spot markets are primarily fueling bitcoin’s recent rally as the leading cryptocurrency trades at three-year highs around $15,500, suggesting the bull market may have room to continue.

Unlike previously rallies, derivatives markets are playing a markedly less prominent role, demonstrated by mild liquidation volumes. 

The presence of derivatives in bitcoin’s ongoing rally is “muted in comparison to previous run-ups,” said Matt Kaye, managing partner at Santa Monica-based Blockhead Capital. Talking to CoinDesk, Kaye said, “The market is clearly spot-dominated, and it appears that most of the bidding is coming out of the U.S.,” continuing a trend CoinDesk reported in May.

On Thursday, BitMEX, a cryptocurrency derivatives exchange known for attracting unorthodox, high-leverage traders, reported $54 million in liquidated bitcoin futures contracts during the most recent rally, well below the still mild liquidation volume of $75 million reported on Oct. 21 when bitcoin reached then-new yearly highs, breaking above $13,000, according to Skew.

Large liquidations might not happen until the leading cryptocurrency breaks above its all-time highs just below $20,000, said Kyle Davies, co-founder of Three Arrows Capital, in a direct message with CoinDesk. “Frankly, there’s not much leverage in the market now anyways,” he said. 

Significant price movements typically trigger large-scale liquidations in characteristically overleveraged cryptocurrency futures markets. But the mild liquidations throughout bitcoin’s recent rally signals that the typically prominent derivatives markets has taken a back seat and the spot market has the wheel. 

Corroborating the quietness of derivatives markets amid bitcoin's soaring price action is that less than $500 million in bitcoin futures positions had been liquidated in the past 24 hours, as of 14:35 UTC Friday, across seven leading trading platforms as bitcoin neared $16,000. The largest reported liquidation of $5.97 million happened on BitMEX, according to derivatives data aggregator Bybt.

Regulatory troubles weathered by leading leveraged trading exchanges including BitMEX, OKEx and Huobi explain the subdued influence that derivatives markets play in bitcoin’s current rally, according to Davies. 

That liquidation volumes are low relative to bitcoin’s price movements could be an encouraging sign for bitcoin bulls, according to Aditya Das, cryptocurrency market analyst at Brave New Coin.

"The quiet funding rate and relatively low number of liquidations could be read as a positive sign that this rally may have legs and is not close to overheating because of speculators,” he told CoinDesk in a direct message. 

The market could also be signaling that futures traders simply “missed out on the big move,” Das added. 

Disclosure

Please note that our privacy policy, terms of use, cookies, and do not sell my personal information has been updated.

CoinDesk is an award-winning media outlet that covers the cryptocurrency industry. Its journalists abide by a strict set of editorial policies. In November 2023, CoinDesk was acquired by the Bullish group, owner of Bullish, a regulated, digital assets exchange. The Bullish group is majority-owned by Block.one; both companies have interests in a variety of blockchain and digital asset businesses and significant holdings of digital assets, including bitcoin. CoinDesk operates as an independent subsidiary with an editorial committee to protect journalistic independence. CoinDesk offers all employees above a certain salary threshold, including journalists, stock options in the Bullish group as part of their compensation.


Learn more about Consensus 2024, CoinDesk's longest-running and most influential event that brings together all sides of crypto, blockchain and Web3. Head to consensus.coindesk.com to register and buy your pass now.