Cleansing or Reversal? Over-Leveraged Apes Get Punished and Funding Resets as OI Drops Over 21%

The flash crash on Tuesday wiped out more than $380 billion from the cryptocurrency market, with Bitcoin falling to about $42,000 and Ether going under $3k. After bouncing back to $47k and $3.5k, BTC and ETH are now hovering around $46k and $3,400.

According to Delphi Digital, “a negative feedback loop of liquidations seems to be the primary cause, as the market punished over-leveraged apes.”

On Sept. 7, $3.5 billion were liquidated. But with the price not yet stabilized, in the last 24 hours, 353,908 traders have been liquidated for $3.46 billion — the most since May 19.

Bybit accounted for 35.7% of these liquidations at $1.33 billion, followed by Huobi at 23%, $860 million. Binance’s share was 21.3%; however, given that they don't report the correct numbers, liquidations on the leading cryptocurrency exchange are more than likely much higher than the Bybt recorded $792 million.

The majority of the exchanges had 85% to 99% of these liquidations coming from longs, while only Deribit and FTX had a good 48.32% and 30.37% coming from shorts.

According to glassnode, in this round of decline, the proportion of long active liquidation is as high as 92.7%, which is the largest proportion since May 19th. pic.twitter.com/neaZDoqerw

— Wu Blockchain (@WuBlockchain) September 8, 2021

With so much leverage wiped out of the market, open interest on the exchanges also took a hit.

Bitcoin futures contracts saw a loss of $4.18 billion in OI, going back to the early August level. As for Ether, the OI has fallen to $8.37 from the all-time high of $11.62 on Monday.

On CME, OI on Ether is at $709.5 million, a level that was seen on Sept. 1st and still much higher than the May high of $607.88 but down from $860.75 million ATH. As for Bitcoin futures, OI is $1.51 bln, down from $1.88 bln on August 29th and $3.26 bln peak from Feb 26.

$BTC basis dropped frm 16% to 9%, perp-spot basis finally turned negative. That's the reset the market needed.

— Alex Krüger (@krugermacro) September 7, 2021

As Delphi Digital noted, “High open interest can be seen as traders starting to open more futures positions, most often with some amount of leverage.”

As a result, the long-term funding trend has reset to 0.05%, much lower than the prior peaks of 0.20%. Low funding implies a balanced demand, not skewed towards longs or shorts.

Before the crypto carnage happened on Tuesday, futures traders were eyeing further upside as seen in rising basis premiums which suggested a growing bullish sentiment among the leveraged traders.

When the $50k breakout occurred, the futures' basis finally moved upwards last week after more than a month of no developments in the futures market. In the offshore futures market, the basis saw a sharp rise — on FTX, it went to 14% after trailing around 8-10% throughout August, while on CME, it grew far less rapidly.

But now, the liquidation has provided the market with “a meaningful leverage reset.”

Big dip with lots of retail liquidations on exchanges

No institutional liquidations or losses on @CelsiusNetwork

We still see strong demand for stablecoins which tells me we are going higher after retesting today’s lows on BTC and ETH. #HODL on and #UnbankYourself

— Alex Mashinsky ©️ (@Mashinsky) September 7, 2021

Now that the market has reset, participants are expecting to go higher from here, with trader Light saying,

“32% haircut to total derivatives open interest, funding structure reset after an orgy of a long weekend. Buying versus forced sellers is almost always a good strategy. If had to guess, dip feels more like a cleansing than a reversal.”