Following a rather bleak jobs report, there’s a lot of chatter about whether the United States is headed for a smooth economic adjustment or if we’re staring down the barrel of a full-blown recession. It’s been a bumpy road, to say the least.
This past Friday was particularly rough. All five major U.S. stock market indices took a dive, and Bitcoin wasn’t spared either, dropping to a low of $60,706. As the time of writing, Bitcoin is trading at $61,290, reflecting a 4.64% drop in the last 24 hours.
What Triggered This Decline?
The key trigger for this downturn seems to be the latest data from the U.S. Bureau of Labor Statistics. It showed that unemployment has climbed to its highest level since the pandemic began. Temporary layoffs reached a three-year peak, and private-sector hiring hit a 16-month low. Not surprisingly, the market didn’t take this news well.
Other factors are likely contributing to the current investor sentiment:
- Federal Reserve Decisions: The Fed decided against an interest rate cut last week, which could have provided some relief to investors. However, there’s still hope for a cut in September.
- Global Unrest: Ongoing unrest in the Middle East adds another layer of uncertainty, making investors even more cautious.
Broader Market Reactions
The stock market wasn’t the only one hit hard. The S&P 500, Dow Jones, Nasdaq Composite, NYSE Composite, and the Russell 2000 all closed in the red. Meanwhile, precious metals like gold and silver stayed relatively stable, suggesting that investors might be seeking safer havens amid the turmoil.
Bitcoin ETFs and Market Movements
Amidst all this chaos, Bitcoin ETFs saw some interesting movements. There was a net outflow on Friday, with Fidelity selling around 1860 BTC worth $104.1M. On the flip side, Blackrock’s IBIT ETF bought another 683 BTC for its investors. This suggests a mixed sentiment among institutional investors—some are cashing out, while others are buying the dip.
Liquidations in the Bitcoin Derivatives Market
The decline in the crypto market led to a wave of liquidations in the derivatives market. What are liquidations, you ask? Well, they occur when a trader’s position is automatically closed by the exchange because the trader doesn’t have enough funds to keep the position open. It’s a way for exchanges to prevent traders from losing more than they have.
On Friday alone, $270.42 million was wiped out, with $229.54 million of that being long positions—bets that the price would go up. Among these, Bitcoin accounted for $83.52 million. It’s like a domino effect: as prices drop, more and more traders hit their limit and get liquidated, which can push prices down even further.
How Do Derivatives and Leverage Work?
Let’s break down some basics. Derivatives are financial contracts whose value comes from an underlying asset, like Bitcoin. Instead of buying Bitcoin directly, you can trade these contracts.
Now, leverage is where things get interesting. Leverage allows you to control a large position with a relatively small amount of money. Think of it as a way to amplify your trading power. For example, if you use 10x leverage, you can control $10,000 worth of Bitcoin with just $1,000.
However, leverage is a double-edged sword. While it can magnify your gains if the market moves in your favor, it can also amplify your losses if things go south. This is where liquidations come into play. If the market moves against your position and you don’t have enough funds to cover the losses, the exchange will automatically close your position to prevent further losses.
There is good news though. According to Samson Mow, CEO of the Bitcoin technology company Jan3, Bitcoin’s drop as a result of the derivates markets/TradFI, should only be temporarily, as it is gearing up to what he calls its “Main Event”. Last week Mow in a cryptic manner said that the markets were going to be a bit more green after upcoming super bullish news. The wait is still there it seems.
#Bitcoin is just being dragged down temporarily by TradFi markets – amplified because of increased surface area due to ETFs. But with M2 on the rise again it feels like the main event is almost here. ♎️ pic.twitter.com/uecfBUnD5D
— Samson Mow (@Excellion) August 3, 2024
What Does This Mean for Us?
For those of us who are invested in Bitcoin or considering entering the market, it’s a reminder of how volatile things can get. Understanding market dynamics, including concepts like liquidations, can help us make more informed decisions.
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