Liquidations: ACTIVATED

On Friday afternoon the crypto markets bore witness to the largest liquidation cascade since the 3AC saga. Today's Morning Note will run through the numbers and understand their impact

The information contained here is for general information only. It should not be taken as constituting financial advice. Stormrake is not a financial adviser. You should consider seeking independent financial advice prior to making any personal investments.

The markets deliver punishment

Looking at data from Coinglass, we can see that the long liquidations that had occurred on Friday had rivalled the June 2022 crypto credit crunch which saw Bitcoin drop from 28k to 18k in the span of a few days.
The $ value liquidated in June was approximately $685 million on the long side and we had seen $562 million wiped on Friday’s cascade. It’s worth noting that shorts held up much better in this drop as it was straight down without much relief to the upside.

The merge trade gets overheated

Having a look at Bitcoin’s liquidation events over the last few months, we can see Friday and June 2022 events being considerable outliers but otherwise quite stable, highlighting a lack of speculative interest in Bitcoin. The approx. $ value wiped from BTC leverage was $343 million in June and $209 million on Friday. This trend shows us that even the large liquidation events are affecting Bitcoin on a lesser scale.

This is the complete opposite for Ethereum where we are now witnessing increasing volatility as we head into the merge. This shows the speculative mania to be expected, with one of the most highly anticipated events in crypto history. In June 2022 we saw $219 million liquidated due to the 3AC saga but again in July and in August 2022 we saw over $200 million worth of long liquidations, highlighting the feverish long pile on that has been occurring. Speculative mania never bodes well for any event let alone a highly technical event such as the merge with excess of hundreds of billion dollars worth of network value.

Exchange ETH Futures Open Interest

Ethereum open interest (OI) has obviously exploded, but to provide a sense of scale, the current OI on ETH as a % of market cap is approx. 3.6%, now when compared to BTC which is about 2.9% which shows us there is 80% more speculative activity going on ETH relative to market cap. Again, this type of setup is a highway to max pain, as markets are highly efficient at finding out who is swimming naked.

Total ETH Options Open Interest History

The speculative mania is not just limited to perpetual swaps but also showing up in the options markets with an even larger variance between BTC and ETH open interest. This is due to the highly time sensitive nature of the merge which is set to occur approximately Sept 16th - 17th and it shows that traders are piling into calls particularly the 3k strike with end of Sept 22 expiries. As always, markets love to find the point of maximum pain and if this adage is to hold true, ETH trading anywhere under 3k by end of September would be the maximum pain point for speculative traders.

Safety in spot markets

The above shows the dangers of leverage. Only the most sophisticated traders and institutions should use these products, the everyday crypto investor would fare much better by simply being prudent with timing their purchases or dollar cost averaging the blue chip digital assets. This will allow investors to sit in positions comfortably until the next bull run and not have to worry about maturities adding to losing positions or managing leveraged contracts. All they have to do is stomach the drawdowns and invest wisely to ensure that their lifestyle and living expenses being serviced.

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