$1.2 billion in Bitcoin was liquidated during last week’s crypto crash. It was not simply Bitcoin, clearly. The collapse of Terra amounted to a degree of market contagion, which hurt crypto markets in general.
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Do you think you have had a poor week? Try putting yourself in the shoes of a cryptocurrency day trader.
According to data analytics firm CoinGlass, between Sunday, May 8—when the TerraUSD stablecoin started losing its peg to the US dollar and crypto markets started to fall Saturday, May 14, Bitcoin derivatives traders lost approximately $1.2 billion in liquidations.
That is more than double the $542 million in transactions liquidated the prior week over the same time period. The situation was similar across the board. According to Coinglass data, over $1 billion in total crypto assets were flushed off on May 8, the highest sum in over three months.
Have a look at the costs to see why. Bitcoin fell from $35,500 on May 8 to $30,100 on May 14, losing nearly $300 billion in market capitalization. According to CoinMarketCap, BTC is presently selling at roughly $29,700.
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Liquidation happens in investing when traders are forced to close a long or short position in an asset that is doing poorly, either voluntarily or involuntarily. Investors gambling on Bitcoin derivatives (futures, options, and perpetual contracts) may be compelled to liquidate if their account does not have enough collateral to maintain the position open due to a margin call.
A trader who takes a long position expects the asset’s value to rise. In a short position, on the other hand, the trader expects the value of an asset to fall over a certain period of time.
If the trader believes the price will rise and it does, they can relax and enjoy the earnings. If the price falls, the trader will either have to put more money in or risk having their collateral liquidated. Liquidations increase selling pressure on Bitcoin, leading the price to drop further, resulting in further liquidations.
Long positions bore the brunt of the damage at first, but by mid-week, short positions were taking the majority of the damage. Because pessimistic traders expected the crypto market crash to continue, the price started to stabilize.
It was not simply Bitcoin, clearly. The collapse of Terra amounted to a degree of market contagion, which hurt crypto markets in general.
The Luna Foundation Guard, an organization dedicated to maintaining the Terra ecosystem, implemented multiple measures after Terra’s UST stablecoin fell below $1. To restore TerraUSD’s parity with the US dollar, it loaned $750 million in Bitcoin and another $750 million in UST. However, LFG’s forced Bitcoin resale comes at a horrible time for markets, placing downward pressure on BTC and exacerbating the recent crypto meltdown. Furthermore, the move backfired, overwhelming the market with UST and LUNA as Terra entered a death spiral.
According to CoinMarketCap, the Terra ecosystem’s native token is presently trading at $0.0001, and the community is contemplating whether to fork the blockchain before Terra’s UST stablecoin gets de-pegged.