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Fearful Market Shakes Out Little Leverage

Sep 20, 2021 · 4 min read

By Ashwath Balakrishnan

Market Update

Today has been brutal across global financial markets, presumably from fears surrounding China’s real estate market. BTC and ETH were, at one point, trading at $42.5K and $2.9K respectively. The only non-stablecoin in the top 100 that avoided going into the red today was OMG.

An Uncertain Market
  • Ever since the correction a few weeks ago, funding rates for BTC perpetuals have been slightly depressed. We noted last week that sentiment was fragile, and this is yet another sign of that. Price rebounded a bit from the lows, but funding is still negative.
  • Notably, before the flash crash earlier this month, funding rates were pretty high, which tends to imply an influx of longs levering up. However, this time around, the market was not positioned as aggressively, leading to a slightly brighter outcome.

Not a Deleveraging?
  • On September 7th, over $3B of longs were liquidated in a 12 hour period. The vast majority of these liquidations occurred when BTC fell 16% in only 2 hours. This time around, a little over $1B worth of total positions were liquidated in 24 hours. That’s 1/3rd of the liquidations over double the time frame. Not bad relatively speaking.
  • The lack of deep, cascading liquidations implies this was either not a wipeout or the pain isn’t yet over. It’s possible that traders were just looking to de-risk some of their exposure going into tomorrow’s FOMC meeting. Global equities took a beating on today’s open, which could suggest that uncertainty over the Fed’s stance is the main reason for a risk-off environment across markets, amongst other things.

Volatility and Fear
  • The Deribit Volatility (DVOL) index measures the 30D implied volatility using Deribit’s orderbook. Effectively, this index tries to estimate how volatile the options market expects BTC to be over the next 30 days. The figure is annualized, so you can divide by the 19.104 (square root of 365) to find the daily expected volatility. (You can read more about it here).
  • Ever since BTC dipped a few weeks ago, volatility expectations for it have also slowly grinded lower. However, a less aggressive move down over the last few days has caused a spike in volatility expectations. The market seems more fearful now than it was during the flash crash (which was worse). This highlights the weight of tomorrow’s FOMC meeting on global markets. Hopefully, we shed some of the uncertainty as we progress later into the week, getting better clarity on true sentiment.

BTC Spread Widens
  • As is usually the case with sudden collapses in market structure, liquidity on the leading futures exchanges saw a meaningful deterioration over the last few days. While this seems to be a common occurrence in these situations, it’s worth noting that the liquidity deterioration today was not as severe as previous corrections — including the one earlier this month.
  • For further context, liquidity tends to deteriorate close to pivot points (tops and bottoms). A large deviation would happen near macro pivot points, and less aggressive deviations near local pivot points. When one side of the orderbook gets exhausted and has few orders, the bid-ask spread widens. Very simply, market makers stop wanting to sell BTC towards the bottom and start bidding it near the top.

Notable Tweets

Coinbase will not launch its lending product

Potential selling coming out of Asia

Delphi Labs is hiring


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