Bitcoin Volatility and Leverage Considerations
Bitcoin spot trading has become a drop in the bucket compared to the overall volume traded on the market that is now heavily tilted to futures and leveraged products. From equities to commodities, leverage has become a staple tool used to increase the potential upside with capital limitations.
But Bitcoin traders face a heightened risk of liquidation due to its volatile nature that is yet to be tamed by a growing market and apparent liquidity.
ZUBR delves into the potential upside as well as the downside of leveraged trading. We assess the overall trader and market risks taken with high margins that prove to cause cascading liquidations, toppling cryptocurrency markets along with it during periods of increased volatility.
Key Take-Aways
• Bitcoin liquidations on BitMEX alone have hit nearly $25Bn in nominal value since January 2019 through till the end of March 2020. While recent price fluctuations last month stole headlines having priced out $3Bn in positions, this was only the third-highest monthly loss traders took in the past 15 months.
• Although historical data shows that Long positions have an equal opportunity as Shorts with Bitcoin price fluctuations, the lions share of liquidations are burdened by bullish traders.
• 100% of positions taken with 100x leverage would be liquidated on a day-to-day trading timeframe and not far behind with 50x leverage would have seen 99% of trades priced out. Data shows that anything from 25x leverage would be merely a flip of a coin possibility with Bitcoin volatility remaining high day-to-day.
• Hourly historical data tells a very different story when leverage is used below 25x. Data reveals that leverage used during intraday trading drops the risk of liquidation to below 3%, highlighting a useful tool to deploy capital better. Over leveraged positions, on the other hand, would turn risk management to borderline gambling.
• Volatility in 2020 has increased the likelihood of liquidations versus 2019 to date for both hourly trading frames and day-to-day. But using even 20x has shown to be low-risk with only a 1.9% of hourly trading windows being liquidated on long positions and 1.1% on shorts.
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