Yesterday’s collapse of the cryptocurrency markets marked a significant event: the largest wave of liquidations since 2021. In this article, we analyse the microstructure of the event to understand the factors that caused this jolt.
One of the most surprising aspects of this dump was the role played by traders on Coinbase, who started selling aggressively even before the main collapse. This behaviour created an environment of selling pressure that brought the market into a critical zone, encouraging the liquidation of overexposed positions.
The increase in the Funding Fee and Open Interest was a clear sign of an overheated market, with many traders taking on too much debt to speculate on rising prices. In short, a first signal was already there.
But the real collapse was triggered by a cascade of liquidations. This phenomenon occurs when falling prices force brokers or platforms to automatically close trading positions to avoid further losses, thus amplifying the bearish movement.
On perpetual swaps platforms, the stop loss and liquidation mechanism accentuated the impact. These instruments, popular among crypto traders, are subject to extreme movements when trading volumes suddenly increase.
After the dump, the market showed signs of divergence between the main assets. ETH, for example, showed significant buying pressure immediately after the crash, suggesting that some investors may have taken the opportunity to buy at lower prices.
An even more interesting phenomenon occurred with XRP on Coinbase. Here, a series of large sell orders caused the price to fall by more than 5%, an unusual occurrence in a mature cryptocurrency market. It is possible that a large player was forced to liquidate its positions, causing a domino effect.
But then, as we have seen, there was a recovery: as often happens in hot markets, the dump was followed by a rapid rebound from the lows. This phenomenon is fuelled by traders seeing the drop as an opportunity to buy, as well as liquidation volumes leaving room for new positions. Surprisingly, during the dump, some cryptocurrencies showed unexpected strength. For instance, ADA’s cumulative turnover was particularly high, a signal that this altcoin attracted significant attention even in a bearish environment.
What is to be expected? One lesson is certainly the importance of closely monitoring indicators such as Funding Fee, Open Interest and market liquidity. Particular situations such as XRP highlight how important it is to understand the impact of large market orders in a low liquidity environment. We may be facing a critical moment for some altcoins, with the possibility of upside or further turbulence in the short term. One thing is certain: the crash of 2024 will remain one of the most significant events in the recent history of the crypto market.
Today’s dump resulted in the biggest liquidation since 2021. I would like to present a microstructure view of this entire situation. As always, this thread is full of insights, charts, and comments.
Retweet if you enjoyed the analysis. pic.twitter.com/uCbZmPFbc5
– ltrd (@ltrd_) December 10, 2024
