Bitcoin’s retreat from $66K may signal a whipsaw end to an ’emotional’ year

Bitcoin (BTC-USD) may finish 2021 defined by the same vertigo-inducing price action that took it from under $30,000 to a fresh record near $66,000 within the space of a few months, analysts say.

On Thursday, investors booking profits in the wake of the successful launch of two Bitcoin futures-based exchange traded funds (ETFs) last week dragged the digital coin down by about 5% on the day. More new funds are expected to hit the market from issuers like VanEck, Galaxy Digital and Bitwise, leading many investors to believe the price has more room to run up in 2021.

Meanwhile, leveraged investors also liquidated positions on future Bitcoin bets. Leverage is money borrowed from an exchange or market maker that allows a trader to increase both the gains and losses they might receive from buying a specific asset.

With more than $185 million of BTC liquidations in the last 24 hours, according to ByBit, analysts expect more short-term volatility as the year ends.  

“I am expecting weekly moves over $20,000 each way as we close out the year,” wrote Nik Bhatia, author of the macro-economics focused newsletter, Layered Money, on Tuesday.

To be sure, this most recent BTC price swing is paltry relative to the $4.87 billion liquidated on April 15, the year’s worst day for BTC derivatives traders. 

Yet both movements, as well as the $1.2 billion liquidation in levered positions that occurred in early September, come with an obvious lesson: highly levered Bitcoin positions can lead to a cascade of selling that can ultimately sink the spot price.

One major cause of liquidations in the options and futures market is the cost for holding a levered position, which is high. If these margins grow too pricey for traders taking long positions, they can decide to liquidate their position instead of paying the margin.

“It could be unexpected events that really changes the mood of the market. Also, if leverage keeps building and expectations get higher and higher than those expectations alone not being filled and having so much money behind them can cause a significant correction,” Sui Chung, CEO of CFBenchmarks, told Yahoo Finance.

‘Emotional’ market

Chung’s company is one of the major firms that provides indices – aggregated price measurements – on various crypto assets for large institutions like the CME and Goldman Sachs. Up until last week, premiums for going long on BTC options haven’t worried him. That means this relatively small drop of 6% could signal a healthy market by BTC standards.

However, with the first U.S. futures-based Bitcoin ETFs now tradable, the combined leverage from BTC futures and options contracts can be expected to play a growing role in Bitcoin’s price swings according to Velte Lunde, an analyst with Arcane Research, a crypto firm. 

And Like Bhatia, Lundt anticipates volatility in the crypto asset to continue through the end of the year, in addition to the asset seeing higher prices by year’s end.

“Weekly moves between $10K to $20k is a likely scenario, due to active traders and high leverage. It’s fair to assume that a bunch of these traders are not comfortable now that bitcoin is once again trading below $60k,” he told Yahoo Finance.

The CME futures lead the price discovery of bitcoin both within the futures market and spot market according to research from Lundt and asset manager, Bitwise. That should only increase until the SEC approves a Bitcoin spot ETF which could catch more investor interest given the additional costs associated with futures-based ETFs.

While futures-based ETFs like BITO and BTF don’t hold BTC directly, they do influence Bitcoin’s price according to Sui Chung, the CEO of CFBenchmarks.

For instance, like the major U.S. oil futures-based ETF, USO, $BITO is already one of the major holders of Bitcoin futures contracts. “If you liquidated all the assets in USO tomorrow morning, the price of oil is going to fall” Chung told Yahoo Finance.

Any significant liquidation by an ETF is small, but one leveraged ETF provider, Direxion, has recently filed for an ETF that shorts Bitcoin futures.

“Bull markets can be very emotional. In bitcoin, they happen fiercely, rapidly, and end before you’re able to catch your breath,” Bhatia added.

David Hollerith covers cryptocurrency for Yahoo Finance. Follow him @dshollers.

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