Bitcoin now 77% less sensitive to liquidations than 2021 signalling market maturity

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The crypto market is well known for its volatility and has undergone significant changes over the years, particularly in its response to price fluctuations.

However, a less obvious observation is the reduction of this volatility due to a change in investor behavior, notably within the futures market. An examination of Bitcoin’s price changes and the most significant liquidations in 2021 and 2023 reveals a pronounced decline in the dollar amounts liquidated per percentage change in Bitcoin’s price.

Bitcoin Liquidation Sensitivity Index.

Central to this analysis is the concept of CryptoSlate’s Liquidation Sensitivity Index (LSI). This metric, calculated as the total value of both long and short liquidations divided by the absolute value of the Bitcoin price change percentage, offers a window into how market participants react to price movements. A higher LSI indicates that smaller price movements result in more significant liquidations, a tell-tale sign of market sensitivity.

The LSI utilizes Glassnode data, which tracks crypto native markets including Binance, OKX, and ByBit derivatives trading. These exchanges historically made up the majority of Bitcoin futures trading; however, in recent months, CME has begun to gain considerable ground. Analysis of CME Open Interest would give a more holistic view of crypto derivatives to include traditional markets. However, due to limitations in historical data comparisons, the LSI focuses solely on crypto-native markets.

LSI is essentially a measure of the dollar value liquidated per 1% change in Bitcoin price.

The chat below showcases the Bitcoin liquidations from 2021 to the present, with the orange line representing Bitcoin price and red and green showing short and long liquidations, respectively. While it may be transparent to see that liquidations have decreased significantly since 2021, the LSI reveals the true impact of this reduction.

Bitcoin Liquidations (Source: Glassnode)

Below are the most notable liquidation events from 2021 and 2023 for comparison.

2021

In 2021, the Bitcoin market exhibited high sensitivity to price changes. This is evident from the LSI values recorded throughout the year. For instance, on Jan. 29, 2021, a price increase of 14.24% and long and short liquidations caused a staggering $709.31 million, resulting in an LSI of $49.81 million USD/%. This pattern of high sensitivity persisted throughout the year, with the LSI peaking at $152 million USD/% on April 18, 2021, with a price drop of 14.31%.

Following Tesla’s decision to stop accepting Bitcoin, May 19, 2021, saw wild price swings, falling as much as 28.2% on the day. While the price recovered to close just 14%, CryptoSlate’s analysis uses the most significant price variance as liquidations occur when certain price levels are hit.

Date Price Change (%) Liquidations LSI (USD/%)
January 29 $34,318 +14.24% $709,312,734 $49,811,287
February 08 $45,981 +20.60% $647,552,744 $31,404,109
February 22 $54,092 -16.90% $1,130,237,149 $66,877,937
March 15 $55,813 -11.24% $900,679,036 $80,131,586
April 18 $56,163 -14.31% $2,173,774,372 $152,012,193
May 19 $37,151 -28.20% $1,848,554,713 $66,019,811

2023

Contrastingly, the year 2023 paints a different picture. The market’s reaction to price changes was notably more muted. For example, on Jan. 14, 2023, even with a substantial price increase of 7.33%, the total liquidations amounted to $145.84 million, translating to an LSI of $19.89 million USD/%. This trend of reduced sensitivity continued, as seen on Dec. 5, 2023, when a price rise of 5.17% resulted in an LSI of just $12.32 million USD/%.

Date Price Change (%) Liquidations LSI (USD/%)
January 14 $21,020 +7.33% $145,841,497 $19,896,520
August 17 $26,641 -11.60% $230,674,656 $19,885,746
November 14 $35,534 -4.61% $109,015,995 $23,647,721
December 5 $44,139 +5.17% $63,703,467 $12,321,753
December 11 $42,155 -5.20% $85,490,015 $16,440,387

The difference becomes even more pronounced when comparing the average LSI values for the respective years. In 2021, the average LSI was a high $74.27 million USD/%. In stark contrast, the average LSI for 2023 stands at a much lower $18.93 million USD/%.

Thus, since 2021, there has been a drastic reduction of $55 million (77%) in liquidations per percentage point change in Bitcoin price.

The Liquidation Sensitivity Index (LSI) for today, Dec. 11, continues this trend, with Bitcoin experiencing a price change of 5% and total liquidations on analyzed exchanges amounting to $85.4 million. The LSI is calculated at $16.44 million USD/%. This figure signifies that for every 1% change in Bitcoin’s price today, the market reacted with approximately $16 million in liquidations.

When contextualized within the broader trend of Bitcoin’s market behavior, this LSI value suggests that Bitcoin futures have become slightly more sensitive to price movement than earlier in the month.

Several factors could explain this decrease in liquidation sensitivity. The crypto market, particularly Bitcoin, has matured significantly since 2021. Investors and traders might have adapted better risk management strategies, becoming less reactive to price changes.

Additionally, the entry of more institutional investors and the development of more sophisticated trading tools could have contributed to a more stable market environment. This change includes the rise of CME as the most dominant futures trading platform in 2023, usurping Binance as the number one platform.

In conclusion, the comparative analysis of Bitcoin’s liquidation sensitivity in 2021 and 2023 highlights a marked shift in market dynamics. 2023 has witnessed a lower value of liquidations per percentage point change in Bitcoin price compared to 2021.

This change reflects a maturing market, potentially indicating a more stable and less speculative environment. These insights are crucial for investors and traders, suggesting a shift towards a more resilient market in the face of price volatility.

Read more crypto analysis with CryptoSlate Alpha.

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