The difference between this week’s Bitcoin price drop and the coronavirus crash of March 2020 is a typical contrast between hodlers and leveraged traders.
According to one analyst, Bitcoin (BTC) dropped by $9,000 in hours on Tuesday due to a major unwinding of leveraged traders and borrowers.
Willy Woo attempted to get to the bottom of what caused BTC/USD to plummet to lows of $42,800 on Tuesday in a series of tweets on Wednesday.
Woo: Bitcoin margin borrowers and open interest may be to blame
With rumors flying over who was behind Bitcoin’s major price dip, analysts have been crunching data in order to understand where the rout began.
Analogies to the March 2020 crash, sparked by coronavirus measures, abound, but Tuesday’s event showed major differences, Woo said.
“Leverage markets sold off but investor buying just got stronger,” he summarized.
“BTC flash crashes are caused by deleveraging, the COVID crash was similar in that derivatives overreacted, but back then it was supported by investors. This one was completely divergent and a mystery. Cheap coins.”
Woo subsequently suspected that the dip came as a result of margin borrowing and open interest. In a classic domino effect, positions unwound to produce a “cascade” of liquidations and a positive feedback loop, which severely impacted spot price.
I think I may have found the culprit. Even though Open Interest was crazy high, spot margin borrowing was also peaking leading up to the crash.— Willy Woo (@woonomic) September 8, 2021
Both markets combined created enough deleveraging power to flush price.
(Margin longs on spot markets unwound as much as derivatives.) https://t.co/rOWIE4aX85
Typo. Open Interest was NOT crazy high, it was within normal bounds.— Willy Woo (@woonomic) September 8, 2021
While the procedures involved may appear complex to the casual observer, the strength of Bitcoin’s recovery and continuous investor buy-ins indicate that the event was not caused by cold feet among hodlers.
According to on-chain monitoring resource Whalemap, large-volume investors who were newcomers to the market provided the vast majority of sell-side pressure.
“So yesterday we had a sell off. The move was quite violent and large volumes of Bitcoin were being sold off on spot markets, researchers tweeted alongside a chart showing where those parties had acquired BTC.
“But who was selling? Not HODLers. Mostly whales and in fact the ones that bought their btc only quite recently.”
For fellow analyst William Clemente, meanwhile, Tuesday provided a welcome reset of frothy derivatives markets.
“Investor activity strengthening + Leveraged speculators wiped = healthy cleansing,” he concluded alongside Woo’s findings.