Long Liquidations Near Three-Month High Amid Crypto Downturn

Key Takeaways:

• A sharp drop in cryptocurrency markets on Monday saw future liquidations spike.
• Coinglass data showed long liquidations hit their highest since 22 January.
• Attention now turns to upcoming US inflation data, as cryptocurrency traders fret about Fed tightening.

Liquidations Spike As Crypto Losses Get Ugly

Monday was an ugly day for cryptocurrency markets, with the space’s total market capitalisation ending the day down 6.5% to under $1.80T from above $1.90T at the end of last week.

The drop, which at one point saw bitcoin fall below the $40,000 mark and ethereum drop under $3,000 (fresh four-week lows for both), saw crypto futures market liquidations spike.

Liquidations are when a broker/exchange closes out a trader’s long or short position due to the loss in their initial margin falling below a certain threshold.

Total liquidation of crypto future longs hit $428.24M on 11 April, data on Coinglass revealed, the highest since 22 January. $146.4M of this was the liquidation of bitcoin future longs, the highest since 21 January, while $103.66M of this was the liquidation of ethereum future longs, the highest since 24 February.

Amid the calmer tone to cryptocurrency market trade on Tuesday, liquidations have normalised. But some traders have said that this could be nothing more than a “calm before the storm”, with US Consumer Price Inflation (CPI) data scheduled for release at 1330BST/0830EDT.

What’s Been Driving Recent Crypto Market Turmoil?

Market commentators have cited a combination of bearish macro factors as weighing on the crypto complex since the start of the month, including a sharp drop in US (and global) equities led by tech and a sharp rise in US (and global) bond yields.

Cryptocurrencies like bitcoin and ethereum have a positive correlation to US equities, particularly in the tech sector. Meanwhile, they have a negative correlation to bond yields, a rise that represents a rise in the “opportunity cost” of holding non-yielding assets (like crypto or precious metals).

Traders said the main driver of the downside in global stock and crypto markets and upside in yields is being driven by shifting expectations for Fed policy. Policymakers at the world’s most important central bank have been guiding market participants to expect a more aggressive monetary policy tightening cycle in recent weeks.

The bank is now expected to begin raising rates in 50 bps intervals at its next few meetings, as it aims to get interest rates to a level seen as having a “neutral” impact on the economy as quickly as possible. Most estimates put this neutral rate in the 2.0-2.50% area, as much as 200 bps higher than current levels.

The reason the Fed is in such a hurry to lift interest rates is due to the wave of inflation that has engulfed the US and much of the global economy. The upcoming release of US CPI data will be a timely reminder of the scale of the problem the Fed faces.

The headline YoY rise in the Consumer Price Index is seen hitting 8.4% in March, a forty-year high. Any upside surprises would weigh heavily on crypto and equity markets and would push US (and global) yields yet higher, given that it would likely trigger a further build-up of Fed tightening bets.

Many crypto strategists have been putting out calls for bitcoin to revisit the $30,000 area and for ethereum to revisit the $2,000 mark in the coming weeks/months as equities continue to struggle and bond yields continue to press higher.

Such turmoil would almost inevitably result in further losses for traders in the form of elevated liquidations.