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Crypto derivatives market down but not out as $3B expiry sours the mood

The spot price crash reveals a high correlation with the derivatives markets as nearly $3 billion worth of options stand to expire in May.

Bitcoin (BTC) led the entire cryptocurrency market through a tumultuous period after the majority of the cryptoverse was painted red on May 19, a day now also referred to as “Black Wednesday.” 

BTC’s price fell below $40,000 for the first time since it blew past the resistance level on Feb. 9 on the back of the news of Tesla purchasing $1.5 billion worth of BTC while also announcing that it would begin accepting Bitcoin as a payment method.

At the time of writing, BTC’s price has slightly rebounded to the $37,000 range, bouncing between the $36,000 and $40,000 marks and failing to break out in either direction.

The irony of this crash in the price of the flagship cryptocurrency is that the trigger for the meltdown was Elon Musk opining over concerns of Bitcoin’s energy consumption, and his firm, Tesla, withdrawing its acceptance of Bitcoin as payment. Cointelegraph discussed more on this with the Market Insights team of OKEx, a cryptocurrency exchange. A spokesperson elaborated on these events, saying they were merely triggers to shake an overheated market:

“We had seen significant rallies in altcoins despite BTC facing continued downward pressure, and any hint of pessimism was enough for market participants to start selling their assets in a bid to lock profits or cut losses. The high volatility and sudden price shocks also meant that a lot of leveraged long traders were liquidated, resulting in further losses and a sharper price drop.”

Another factor that extended the market crash was China ramping up the ante against Bitcoin mining and trading activities. The news came as part of a general clampdown on illegal activities around securities in a bid to sustain the stability of stocks, bonds and forex markets by the State Council’s Financial Stability and Development Committee.

Among many other altcoins impacted, Ether (ETH), the predominant altcoin, took a major hit to its price as well. ETH hit an all-time high of $4,362 on May 12, but following the market-wide bloodbath, the token’s price fell to a 30-day low of $1,922 on May 23, resulting in a 55% price drop. In the rebound that followed, the price grew over 35% to trade in the $2,800 range.

Needless to say, both Bitcoin and Ether products dominate the crypto derivatives space due to the sheer prominence of these tokens. While price discovery of an asset is highly dependent on the futures market, unexpected price movements often lead to huge losses for the investors involved.

The crash led to huge liquidations

The Bitcoin futures market has seen enormous growth in 2021 along with the increase in the spot price. Open interest in exchange-traded BTC futures hit an all-time high of $27.68 billion on April 13. But amid the market crash, the open interest crashed nearly 58% to reach a 90-day low of $11 billion on May 23.

The OKEx Insights team further elaborated, “About $8.61 billion of positions were liquidated across derivatives exchanges on Black Wednesday.” As the result, OI dropped from $2.1 billion to $1.3 billion on OKEx. The spokesperson added, “As of now, no significant rebound in open interest is visible, indicating that the market is lacking confidence.”

Source: Cointelegraph