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1/10 What happened to Bitcoin when it went from $12,100 to $10,600 in just a few minutes? It was a chain reaction that started when a whale decided to take profit after Bitcoin hit $12,000. Short thread:
2/10 Bitcoin had been bullish for the past couple of days so a lot of speculators had taken leveraged long positions on futures and options markets. These positions become more valuable when BTC goes up, but go quickly down in value when BTC goes down.
3/10 The moment BTC hit $12,000 was right afer midnight on a Saturday night in New York and around 6:30 AM Sunday in Europe. That means that most of Europe and N-America was not trading, only the Asian traders were in the market. Therefore liquidity was relatively low.
4/10 When the whale took profit it immediately caused a (small) price drop. However, because speculators were long some of them had to put up additional margins to keep their positions open. Being leveraged they could not do that, so they had to close their position (=sell BTC).
5/10 Because the liquidity was so low on a Saturday night/Sunday morning hat caused more traders to be liquidated (=forced to sell), causing the price to fall even further. This chain reacion basically led to a $1500 fall in the BTC price within 10 minutes.
6/10 This might not have happened if BTC had not been steadily going up for a few days so most traders were going long. It also might not have happened if BTC would have hit $12,000 on 10 AM New York time on a Monday morning, when both Europe and Asia would have been trading.
7/10 Nothing is wrong with Bitcoin and the price will recover soon. But it shows that highly leveraged derivatives (Bitmex offers up to 100 times leverage!) can cause significant price changes in BTC, especially when the market is not liquid enough to stop a chain reaction.
8/10 The same thing happened on March 12 (a Friday night New York time, early Saturday Europe). Leveraged positions were liquidated in Bitmex and the price crashed from $5800 to $3800. It recovered quickly as well, but it shows the effect derivatives can have on price on weekends
9/10 Lesson to be learned for people who don't follow 24/7? Don't be alarmed if BTC crashes all of a sudden, there is simply too much leverage in derivatives market and too many inexperienced traders are playing with money there. Do not sell!
10/10 The Bitcoin price always comes back fairly quickly, so if you see it happen it's actually a chance to make quick money. I don't play that game, but it can be a lucrative strategy. We will see this kind of crashes more often now that a new bull market has started. HODL on!
