Market Wrap: Crypto Traders Reduce Leverage, Selling Pressure Subsides

Bitcoin stabilized at around $41,000 on Friday and is down about 9% over the past week. Analysts expect prices to move sideways, although they may be vulnerable to further declines if technical support levels are breached.

The reduction in leverage in bitcoin and ether futures markets could signal healthier market conditions. Typically, there is a lower chance of additional downside volatility when traders reduce their position sizes.

Earlier this week, “based on liquidation data, it seems like a few leverage traders tried to speculate on a rebound and got burned in the process,” Genevieve Yeoh, a research analyst at Delphi Digital, wrote in a blog post.

Liquidations, which can accelerate downward price movements, occur when an exchange forcefully closes a trader’s leveraged position as a safety mechanism due to a partial or total loss of the trader’s initial margin. That happens primarily in futures trading.

For now, bitcoin remains near a three-month low, tracking declines in global equity markets.

Some analysts are pointing to signs of stabilization in crypto markets following Wednesday’s sell-off. After roughly $800 million in liquidations during the price dip, selling pressure could subside over the short term.

“We have already seen significant de-risking in recent weeks with both BTC and ETH perpetual swap funding rates near zero,” David Duong, head of institutional research at Coinbase, wrote in a newsletter on Friday.

A perpetual swap is a type of crypto derivative trading product, similar to traditional futures.

“Leverage has been reduced sharply, reflected in the BTC basis falling from 20% in early Q3 2021 to 5% in January 2022 and the ETH basis falling from 20% to 2% over the same period (according to Deribit),” Duong wrote.

The net flow of bitcoin and ether to and from exchanges has trended lower over the past year. This week, however, more BTC moved into exchanges, which could signal a bearish shift in investor sentiment.

Net inflows imply investor intention to sell, while consistent outflows represent strong holding sentiment and take out circulating supply from the market, paving the way for price rallies.

While the recent uptick in net inflows to exchanges doesn’t signal a trend shift, analysts are closely monitoring a sustained rise similar to January, which could lead to a prolonged market sell-off.

Most digital assets in the CoinDesk 20 ended the day lower.

Largest winners:

Largest losers:

Sector classifications are provided via the Digital Asset Classification Standard (DACS), developed by CoinDesk Indices to provide a reliable, comprehensive, and standardized classification system for digital assets. The CoinDesk 20 is a ranking of the largest digital assets by volume on trusted exchanges.