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Leverage Wipes Out, But Is the Worst Behind Us?

Oct 27, 2021 · 3 min read

By Ashwath Balakrishnan

Market Pullback Hits Top Performers

  • The last 24 hours have been a whirlwind for crypto markets with base layer tokens taking the biggest hit, many of which are down a fair amount from yesterday’s highs. ATOM’s two-day performance is still in the green thanks to yesterday’s rally; SOL, AVAX, and NEAR are all down at least 8-12%.

  • Outliers in today’s ugly market comes, surprisingly, in the form of DeFi tokens and SHIB (aka “the DOGE killer”). 1INCH price action today was overwhelming and likely catalyzed by the token’s listing on Korean exchange Upbit. AAVE was also listed on Upbit, and within an hour of the listing, both tokens had already established a “Kimchi premium.”
$500M Liquidated in Under an Hour

  • The steep dip in prices caused a meaningful liquidation cascade, the vast majority of which occurred within a 40 minute time period at around 7:30 AM UTC today.
  • While unfortunate for the poor souls who were liquidated, the market was in need of a proper deleveraging. There was too much momentum built up from $60K onwards, almost entirely caused by leveraged traders. With not much demand to push BTC and ETH beyond their recent ATHs, it seemed the only way up was to drawdown first.
  • Note: as a reminder, Binance’s API no longer reports all liquidations that occur on the exchange, so this number is likely much higher.
Funding is Falling, But Deleveraging Not Fully Reset

  • The average daily funding rate across exchanges (pictured above) is down from its recent high a few days ago, but it looks like there’s still some room for rates to fall.
  • Open interest on exchanges like Binance and Huobi experienced a massive wipeout, which confirms the aforementioned deleveraging. In fact, funding rates on exchanges like FTX and OKEx turned negative at one point, but were balanced out by positive funding on Binance and Bybit.
  • For reference, the funding rate is derived from the difference between the market price of perpetuals and the spot index it’s anchored to. Excessive buying of perps increases the spread between perp price and the spot index, causing funding to up. Conversely, negative funding is incited by an influx of perp shorting, forcing the contract’s price to fall lower than spot prices. For funding to fall lower, one of two things needs to happen: either existing longs get shaken out and are forced to cover, or there’s an increase in bearish sentiment prompting traders to go net short. Either way, it’s unclear whether we’ve found a local bottom yet.
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