We spoke to thought leaders at Advanced Markets, FXOpen, and Equiti Capital to get their take on what caused last month’s crash as it is unlikely to be the latest.
It’s June. We got past the May market crash that took many crypto traders by surprise (and panic). As we move into the weekends, the only 24/7 open market gets all the attention.
With most of the cryptocurrencies in the red today, we have decided to review the crypto crash of last May and confirm that the trading industry is flocking to the new asset class for the same reason as the market suffered a temporary blow: volatility.
Bitcoin alone has seen traders liquidate around $ 12 billion in leveraged positions during the last week of May, with around 800,000 crypto accounts blown in the process, according to bybt.com.
As usually happens in highly leveraged markets, upward movements are magnified, but so are downward spirals. Selling leads to more selling until the system balances out.
From their highs, the biggest cryptos by market cap (according to coinmarketcap.com) – excluding stablecoins – have fallen quickly and hard.
Bitcoin (BTC) fell from 65,000 to 30,000, while Ethereum (ETH) plunged from 4,380 to 1,732, Binance Coin (BNB) fell from 692 to 212, Cardano (ADA) fell from 1.77 to 1 , 26, Dogecoin (DOGE) fell from 0.74 to 0.22, Polkadot (DOT) bled from 49.75 to 13.81, and Polygon (MATIC) fell from 3 to 0.75.
Ripple’s XRP is a particularly interesting case. The XRP cryptocurrency lost two-thirds of its value from 1.96 to 0.65, at a time when most exchanges decided to restrict trading in the instrument for the time being due to the SEC lawsuit. against Ripple.
Since filing the complaint in late 2020, the Securities and Exchange Commission has faced angry XRP holders who feel their rights are not protected. John E. Deaton, the lawyer for the XRP holders who filed a motion to intervene in court, even suggested holders – or investors, depending on the answer to the question “Is XRP a security?” – are targeted by the SEC.
So, with crypto exchanges blocking XRP trading, volumes are likely to get thinner. It turns out that XRP is the fourth most traded digital asset on Kraken (an exchange that has also halted trading of XRP in the United States) and other sites.
This is the result of margin trading in cryptocurrencies, which is particularly prevalent in Asia-Pacific jurisdictions. According to a 2021 University of Cambridge crypto asset benchmarking study, APAC exchanges offer significantly more leverage.
“While this allows for larger gains in speculative trades, it also accelerates losses exponentially,” said Natallia Hunik, Director of Revenue at Advanced markets.
“The kind of volatility we see in crypto assets is unusual when it comes to traditional financial instruments. Therefore, given the combination of lower liquidity than traditional assets and higher volatility, over-leveraged crypto trading is more likely to create a cycle or trend. , and ultimately to lower the price of the crypto asset.
Natalia Zakharova, Sales Manager at FXOpen, said the crypto crash came as an unpleasant surprise to asset holders despite the long-awaited extreme volatility. The b-book model comes to mind when discussing high leverage accounts and blown accounts.
“I have serious doubts about how sites offering 1: 100 leverage on cryptos are hedging their positions. I see more harm in retail investors who flock to buy cryptos expecting their bull run to last forever and ignoring all the risks involved.
The forex industry has passed new lower leverage caps as a result of new CFD product rules introduced by the world’s major regulators: ESMA, FCA and, most recently, ASIC.
Digital currencies have become extremely popular with retail clients, especially since the pandemic took hold as more people turned to crypto trading to try and earn an income.
“The phenomenal growth seen in crypto between late 2020 and April 2021 was largely due to major players like Elon Musk supporting the market, but retail traders were also keen to ride the wave higher,” David Madden said. , market analyst for Equiti Capital.
“Margin trading has helped retail traders gain exposure to crypto, but as we saw in May, digital currencies suffered a painful downturn. Last month’s crypto crash highlighted the risks associated with using leverage to trade assets. Retail traders need to understand that leverage can speed up a rally as well as a fall. “
The underlying value of cryptocurrencies or their absence has no place in this discussion. We are still at a time when the question “Is Bitcoin a bursting bubble or a currency that is maturing?” Is valid, but the market ultimately determines the price.
Peter Brandt, the famous futures trader, recently said that there is a 50-50 chance that Bitcoin is heading towards $ 1 million or zero. Cryptocurrencies are on the decline today. We will see tomorrow.