Cryptocurrency panic deepens as traders unwind leveraged bets

Cryptocurrencies sank for a third day in volatile and panic trading, extending a rout that’s continued to liquidate leveraged positions since Sunday.

Many crypto exchanges allow traders to trade on a margin account (using leverage), which means that they can use a relatively small amount of money upfront to borrow the rest in order to hold large amounts of digital assets.  Although the leverage magnifies profits if the price goes in the favorable direction (depending on short or long orders), it leaves traders in a much more vulnerable position if price goes in the wrong direction.

From massive selloff volumes as we indicated on May 11 about the upcoming pullback, investors and traders appear in rush to sell off on the worry that falling prices amid the soured mood and negative outlook will open up a long-lasting downward spiral, adding to a long list of challenges facing digital asset holders in the $2.5 trillion market.

The renewed selloff started on Sunday has so far shown no signs of abating, with bitcoin foreshadowing further losses on the back of a significant pickup in risk aversion and profit-booking after the stall of overall upward momentum combined with lofty valuations, Tesla CEO Elon Musk’s spats and putting the spotlight on the environmental costs of crypto assets, his further worries about bitcoin not being decentralised as claimed.

The actual downturn in the market takes its roots back to early May when President Joe Biden’s capital gains tax (CGT) hike hit the news, triggering cautious market sentiment which eventually let to high sell volumes.

The CGT rise would negatively impact crypto or stock holders who are sitting on large amounts of unrealized gains, and was expected to encourage profit taking before the proposal is legislated. The move makes sense since the tax would later disproportionally affect sellers of the assets that have generated massive unrealized gains.

Further, there is overall realization and reflect among the long-term investors that most of the currently available cryptocurrencies will likely fail as they might be digital assets but they just don't make a good currency. We have further explained it here.

This worry also hi the market when Elon Musk tweeted that he is working with dogecoin developers to improve system transaction efficiency, and he also complained about the high transaction fees.

There are also concerns that there are hardly any environment-friendly cryptocurrency with substantial market cap at the moment despite extensive self-praise and preening by some as the high cost is actually required in the decentralised ledger to discourage malicious activity as it is a “trustless” network. So such concerns about bitcoin’s energy use is far from limited to Elon Musk.

As of press time, Bitcoin (BTC) is changing virtual hands at US $43,500, Ether (ETH) at US $3,340, ripple (XRP) at US $1.50, Binance Coin (BNB) US $525, cardano (ADA) at US $2.07, Dogecoin (DOGE) at US $0.49, ChainLink (Link) at US $37, UniSwap (UNI) at US $34, Polkadot (DOT) at US $39 and Stellar (XML) at US $0.64.

Based on the current market sentiment and activity, it is possible to say any upward traction would likely be limited and further deepening of the current downturn and more market-wide losses shouldn’t be ruled out during this week.

Market noise and buzz around joke or doge currencies and their surge  have also discouraged serious investors as they fear such speculations threaten the global institutionalisation of the serious technology and innovation and would prefer to sit back and wait.

Risk Warning: Cryptocurrency is a unregulated virtual notoriously volatile instrument with a high level of risk. Any news, opinions, research, data, or other information contained within this website is provided for news reporting purposes as general market commentary and does not constitute investment or trading advice.