Transcript
Scott (0:00)
Good morning everybody. Happy Friday. What an eventful day. Yesterday was bitcoin currently sitting at a price of $98,944, but depending on the exchange that you look at, was as low as almost $90,000 yesterday, as high as roughly $104,000. Anywhere from a $12,000 to $14,000 single day candle spread. Absolute insanity. What volatility can do at $100,000. Bitcoin, I believe there was a five minute candle that went roughly from 98,000 to $92,000. Absolutely insane volatility for any who thought that volatility would be dampened with higher prices, that whales couldn't move this market around. But here we are right back at 99,000. I don't have the final numbers on liquidations yesterday, but I saw numbers as high as 2 and 2.5 billion in liquidations. Be careful with leverage out there, kids. Dave, I'm very glad that you are here because you kind of unpacked this in a thread you and I have discussed. I can't even count how many times what happens in these leverage and liquidation cascades. Probably worth explaining here again how the spot market and per market sort of interact and why this can happen and why this isn't some huge fundamental selling event.
Dave (1:27)
Yeah, I mean, it's actually a huge fundamental buying event, but that's a different story. We'll get to why in a second. I just want to make it clear that if you go back to the summer post when we were still bopping around below 30,000 and there was one of these that I wrote up about and did a video on, from a little over 29,000 down to 26, but it hit as low as 24 in percentage terms. This was actually smaller, but the prices tripled. So obviously the numbers are bigger. It was a very typical liquidation cascade. So effectively what we're talking about here is something that has happened in many financial markets over the years. The most big obvious one was Japan. When the futures markets in Japan were 4x, the liquidity of the spot markets and you saw what got commonly referred to as liquidity arbitrage. So here's the deal. You can slowly, over a long period of time, amass a position that is long spot short. Perpetual swaps, you can do so especially in periods of time when the market is moving higher and leverage and funding rates are going higher, do so profitably, that is be paid to put this position on, because what was happening by yesterday at one point instead of 0.01 ish funding rates, which more or less translates into, I mean it's more than the risk free rate because people have more reason to borrow crypto than not. But still relatively inexpensive. It was as high as 0.1, so it was 10x the normal funding rate. What that translates to is being paid significant interest rates in order to be on the short side of the position if you're on a swap. So now imagine that you accumulate a lot of long, you know, a lot of long bitcoin on spot market and a lot of short perpetual swap. And so it's a balanced position. As long as you know you're hedged, you don't make or lose money. Then you wait until a period of time when the market is less liquid. So let's say right after the US market closes, the futures have just, the CME futures have just stopped trading. Most of the US based traders are in the, you know, in the. Well, it would be in the bar. I always think like the UK and the pub and Asia has yet to wake up. So you pick that time of day and you say okay, look out below and you then turn around and dump your long spot position on exchanges where there just isn't enough buy interest and you start pushing the price down. Well, as soon as that happens, the liquidation engines on the swap markets kick in and all those, I don't want to say morons, but unfortunately I think that if you're trading bitcoin on more than 20 to 1 leverage, you probably are a moron. You certainly are not an investor or trader or speculator. You are literally looking for lottery tickets. But there are people who do that. What happens is the liquidation says, oh wait a minute, this position is about to go underwater, I have to sell. And when it sells, it sells price insensitive, that is, it literally just dumps. And so the deal is you sell. And let's say it was, it was at 102 when this started and it ends at 92. Your average price for selling that is probably somewhere around 97, 98,000. But you then have the ability to potentially buy back all of your or your swap short at 92, 93, 94. So you lock in a pretty substantial profit if in fact you can pull this off. Now, you know, forget the morality of it, forget whether it should be legal or not. That mechanic has worked multiple times. And so if you've heard me multiple times, I always look at the funding rates when I see them get substantially high for a period of time, you know, that people could put on the potential to do this. Trade profitably. Whether they actually pull the trigger on it is a different story. Now it's worth noting that if somebody like Saylor or any of these other sovereigns or any of the other, any other large buyer had major spot bids in the market and they tried to do this, the people who tried to do this would get their heads handed to them and they would get killed. So it's not a risk free trade by any stretch of the imagination. Of course, generally that's not the way it happens. Very few people leave resting bids out on the market and it takes time to react. And in fact, most of the algorithms that are used by these accumulators would float with the market and look to pick it up much, much cheaper. So that's the situation and that is almost certainly what happened. It's just this. Whether or not we ever find out who or where, you know, who are the major players, that's a different story. We always talk about it. So anyway, I'll end there. There's probably questions around that.