The Ripple Effect of a $1.6 Billion Crypto Liquidation That Sparked Bitcoin’s Sharpest Drop Since 2021
In Brief
On December 9, 2024, the cryptocurrency market experienced a significant event, with over $1.6 billion in leveraged positions being liquidated, raising questions about market volatility and its impact.
On December 9, 2024, one of the biggest events in the cryptocurrency market’s history occurred. Over $1.6 billion in leveraged positions were liquidated in a single day, marking the biggest occurrence involving Bitcoin and other cryptocurrencies since 2021. Questions concerning the causes of this volatility and its effects on the larger market were raised at this pivotal point in the continuous development of digital asset markets.
Photo: CoinGlass
Putting the Liquidation Event in Perspective
The December 9th spike in the price of Bitcoin confirmed a long-term trend of market inefficiency. These trends emerge when prices diverge considerably from their estimated fair value, opening the door for correction. On December 5, the price of Bitcoin produced a notable downward wick, a notable price divergence that traders predicted would soon be reversed. Analysts calculated that there was a 96% chance that this inefficiency would be corrected, and they were right.
Nearing the lower end of the anticipated range, the price of Bitcoin fell to $94,000. But the steep drop set off a series of liquidations, the biggest of which in three years. Due to the large wipeout of long positions caused by this liquidation event, the cryptocurrency market saw a wider sell-off.
Photo: CoinGecko
When an exchange forcefully closes a trader’s leveraged position, it’s known as a liquidation. This usually occurs when the minimum margin needed to sustain the position is no longer met by the trader’s margin account. Even little price changes can lead to liquidations in highly leveraged markets, increasing volatility.
Leveraged positions in Bitcoin and other cryptocurrencies were quickly terminated during the incident on December 9. The two biggest cryptocurrencies by market capitalization, Ethereum and Bitcoin, saw the most noticeable impact. Long positions in Ethereum totaled $208 million in liquidations, compared to $142 million in long positions in Bitcoin. Major losses were also incurred by altcoins; liquidations on futures exchanges totaled $560 million.
Photo: Ethereum liquidations, CoinGlass
Particularly noticeable was the cascading effect, in which liquidations lead to other liquidations. More holdings became unsustainable as prices fell, creating a vicious cycle of falling prices and selling pressure.
The Function of Exchanges: The Impact of Coinbase
The involvement of Coinbase, the biggest cryptocurrency exchange in the United States, was one of the event’s most notable observations. Analysts from the crypto research account Ltrd pointed out odd behavior on the page. According to reports, Coinbase traders started selling Bitcoin rapidly around an hour before the market-wide decline started. The ensuing liquidation cascade seems to be triggered by this selling pressure.
Coinbase’s aggressive selling practices were noteworthy for a number of reasons. It first emphasized how individual transactions shape market dynamics. Second, it emphasized how the cryptocurrency market is linked and how actions on a single website may have a big impact.
The biggest cryptocurrency exchange in the world, Binance, was also involved, according to cumulative volume delta (CVD) statistics. The preemptive selling on Coinbase, however, gave the story an odd turn and made many wonder about the circumstances and reasons for this action.
Photo: CoinGlass
A Closer Look at Altcoin Carnage
The impact on altcoins was much more severe than the significant losses experienced by Bitcoin and Ethereum. Within a day, tokens like Cardano, Dogecoin, and XRP saw double-digit percentage losses. For example, XRP fell more than 12%, and Cardano and Dogecoin also saw drops.
Photo: XRP liquidations, CoinGlass
There are other reasons for the steep drop in cryptocurrency pricing. First, since altcoins have smaller market capitalizations and less liquidity than Bitcoin and Ethereum, they usually show more volatility. Second, cryptocurrency markets are more prone to speculative trading and overly leveraged positions, which makes them more susceptible to market stress.
With almost $70 million in XRP futures and comparable amounts for Dogecoin futures being liquidated, market data indicated that cryptocurrency futures made up a sizable amount of the liquidations. These figures demonstrated the riskiness of excessive leverage and the speculative nature of cryptocurrency trading.
Fears of Quantum Computing: A Side Effect?
The liquidation event took place at the same time that Google made a big statement about its progress in quantum computing. The tech company raised questions about the ramifications for blockchain security when it disclosed benchmark testing for its new Willow quantum computing device.
Cryptocurrency is theoretically at risk from quantum computing, especially when it comes to private key preservation and cryptographic security. The statement caused a wave of concern in the market, even if these threats are still primarily hypothetical and far off. Although no clear causal relationship was found, some experts conjectured that this news added to the increased selling pressure.
Comparing the Past, Insights from 2021
It is important to compare the December 9 liquidation event with other historical occurrences in order to properly comprehend it. In 2021, a year marked by intense volatility and explosive expansion in the cryptocurrency sector, the market last saw liquidations of this size. High leverage, institutional interest, and retail passion propelled prices to all-time highs at that time, only to be followed by precipitous drops.
The basic mechanics of leverage and emotion have not altered despite the fact that the market environment has changed since 2021 due to heightened regulatory scrutiny and a more knowledgeable investor base. The incident on December 9 serves as a warning that the cryptocurrency market is still vulnerable to high levels of volatility even if it has matured.
Market Reset or Warning Sign?
Participants in the market have differing views on the aftermath of the liquidation event. Some see it as a necessary reset that will remove excess speculation and provide the conditions for more sustainable growth. They contend that lowering leverage fosters a more stable market environment where fundamentals, rather than conjecture, influence price fluctuations.
However, some warn that the incident could indicate more serious market weaknesses. Concerns over market stability and the possibility of more downward pressure have been aroused by the steep drop in cryptocurrency prices and the odd behavior on exchanges.
Disclaimer
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About The Author
Victoria is a writer on a variety of technology topics including Web3.0, AI and cryptocurrencies. Her extensive experience allows her to write insightful articles for the wider audience.
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Victoria is a writer on a variety of technology topics including Web3.0, AI and cryptocurrencies. Her extensive experience allows her to write insightful articles for the wider audience.
