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Summary
- Crypto day traders taking excessive positions on crypto were a major cause of Bitcoin’s massive fall in the past week.
- China’s tightening of regulations and Tesla CEO Elon Musk’s recent comments and announcements regarding the digital currency had been considered the primary reasons for its giant fall.
- Bitcoin traders liquidated approximately US$12 billion in leveraged positions, which subsequently cleaned out approximately 800,000 crypto accounts.
Cryptocurrency day traders borrowing large amounts of capital from crypto brokerage firms is one of the most significant causes of last week’s crash.
Despite many pointing towards China’s recent announcements calling for increased regulation surrounding cryptocurrency trading and Tesla (NASDAQ:TSLA) billionaire Elon Musk’s various flip-flopping regarding the world’s largest cryptocurrency, it’s the traders who are being forced to sell after supposedly taking huge risks, which could be the main culprit.
Bitcoin suffered gigantic losses on Monday, diving below US$35,000 on Monday for the first time since January. The crash came less than a months after the crypto had reached a record high of US$65,000 in April.
Source: © Pikepicture | Megapixl.com
Alternative cryptos also experienced significant losses, with Ethereum, the second-largest cryptocurrency, falling a massive 23% and meme crypto, Dogecoin falling 20%.
The cause of this crash had previously been attributed to China’s recent crackdown on the crypto market as the Chinese government called for tighter regulations of crypto trading in Hong Kong.
Last week, Chinese vice-premier, Liu Hu, said the Chinese government would dish out severe penalties for illegal Bitcoin trading.
Just before Hu’s announcement, three government-backed agencies in China had released reports heavily criticising cryptocurrencies in general, calling them unreal and stating they would face regulations from banks and other governmental agencies.
Source: © Maxsafaniuk | Megapixl.com
Moreover, Tesla Founder and SpaceX CEO Elon Musk recently announced that the electric car company would cease accepting Bitcoin as payment for their vehicles. Musk cited the Bitcoin mining’s harmful impact on the environment as the reason for his decision.
Margin Call
A “margin call” is the loan a trader must pay back to a broker. Often, traders will borrow capital from a brokerage firm to take a bigger position on a cryptocurrency.
In the last week, Bitcoin traders liquidated around US$12 billion in leveraged positions, which subsequently cleaned out approximately 800,000 crypto accounts. As everyone’s liquidation price tends to be around the same price when the crypto falls to a certain price, there’s an automatic sell order across the board and the price is forced further downward.
Currently, there are brokerage firms in Asia that offer 100 – to – 1 leverage for crypto trades, which means the firm will lend the borrower one hundred times the deposit the borrower puts down. It’s this leverage in the crypto market which perpetuates its extreme volatility.
The price of Bitcoin currently sits at US$39,454.49.
