Bitcoin price is down, but here’s 3 reasons why $1B liquidations are less frequent

Bitcoin (BTC) might be struggling to break the $36,000 resistance for the past three weeks, but bulls now have one less thing to worry about: cascading futures contracts liquidations.

One might be under the impression that a $1 billion liquidation is usual for Bitcoin. Still, traders tend to remember the most recent exaggerated movements more than any other price shifts, especially when the price crashes and people lose money.

This negativity bias means that even when various price impacts with equal intensity occur, the unpleasant emotions and events have a more significant effect on a trader’s psychological state.

For example, multiple studies show that winning $500 from playing the lottery is two to three times less ‘impactful’ than losing the same amount from the gambler’s personal wallet.

Bitcoin futures aggregate liquidation (red = longs). Source: Coinalyze

Currently, we are six and a half months into 2021 and there have been only 7 times where a $1 billion or larger long contract liquidation has occurred. So, rather than being the norm, these are very unusual situations that can only take place when traders are using excessive leverage.

More importantly, there hasn’t been a $1 billion short-seller liquidation even when Bitcoin rallied 19.4% on Feb. 8. These liquidations just show how leverage longs tend to be more reckless, leaving less margin on derivatives exchanges.

While retail traders use high leverage and eventually fall victim to liquidations, more intuitive traders that bet on a price drop are likely fully hedged and doing ‘cash and carry’ trades.

This is one of the three reasons why $1 billion futures liquidation should not be a concern right now.

Cash and carry trades have a low liquidation risk

The quarterly futures contracts usually do not trade at par with regular spot exchanges prices. Usually, there is a premium when the market is neutral or bullish and it ranges from 5% to 15% annualized.

This rate (known as the basis) is often comparable to the…

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