Crypto market cap hits $3 trillion again: Why rising Bitcoin leverage could trigger a sharp price swing
Bitcoin pushes the crypto market above $3 trillion as rising leverage, short liquidations and strong ETF inflows raise the risk of sharp price swings.
The total cryptocurrency market cap has surpassed $3 trillion for the first time since January. This surge is primarily driven by a strong rally in Bitcoin. However, the rising market value also attracts more leveraged trading, which could lead to sharp price swings if traders begin closing their positions rapidly. CoinGecko reports that the crypto market has gained over $740 billion since the US Treasury announced increased bond buybacks last month.
According to Bloomberg, open interest in perpetual futures across cryptocurrencies has reached nearly $160 billion, the highest level since late October last year. This indicates a significant increase in speculative trading positions. When Bitcoin rallied, over $920 million worth of bearish positions were liquidated, primarily due to traders who anticipated a price drop.
The forced buying from these liquidations can propel prices even higher, potentially sparking a short squeeze where traders must buy the asset to close their losing positions, leading to further upward pressure. However, new leveraged positions are entering the market simultaneously, replacing the liquidated ones. This trend suggests that traders are still taking on new risks while some bearish positions are being closed.
Analysts warn that a sharp 5% price movement in either direction could occur faster than traders anticipate. If Bitcoin prices rise sharply, more short positions could be liquidated, while falling prices might force leveraged long positions to sell. This creates a situation where the market becomes reflexive, where one price move triggers another.
Despite the rally occurring in the derivatives market, institutional demand for Bitcoin has also risen. US spot Bitcoin ETFs recorded a massive $999 million in net inflows on Monday, marking their largest single-day inflow since October 6. This suggests that some investors are increasingly buying Bitcoin through regulated investment products, indicating growing confidence in the cryptocurrency market.
Written by urgent.news from Hindustan Times - World News's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
