Why did Bitcoin crash 10% within 15 minutes? It's the secret of liquidations!

The biggest reason for volatility in crypto markets are liquidations.

Bitcoin’s dropped from $64,000 to $58,200, representing a 10% crash in just 15 minutes, after many Coinbase users reported their accounts reflected $0 balances.

Many people have asked me why the crash happened yesterday.

I will explain to you the secret of liquidations and how they cause massive volatility in the crypto markets.

Traders often use leverage to increase the potential profit of trade, hence those transactions are done on margin.

They open a margin account with an exchange or broker by signing a "margin agreement" under which the crypto in the account is pledged to the exchange or broker.

In return for the pledge, the broker loans the portion of funds to the investor in order to establish those trades.

When the prices move against the trader, in addition to putting an initial margin payment for establishing his trade, the investor is also required to deposit additional funds in the margin account to maintain his positions - thus the term "margin call".

If the trader's account value falls below the required minimum maintenance level, a broker has the legal right to liquidate those positions to cover the margin call.

Crypto traders today use sophisticated algorithms to make trading decisions and the ability to make consistent profits largely depends on speed.

This paradigm shift has also changed the way brokers handle the liquidations of their client's positions.

Brokers use real-time liquidation procedures, the so-called auto-liquidation algorithms, and automated trading strategies that immediately alleviate clients' margin deficiency.

The broker tracks cash funds in real-time, and if at any point the cash balance falls below the margin balance, the algorithm automatically liquidates positions by sending off-setting transactions to close the open positions and decrease margin deficiency.

In general, broker's clients have little to no control over the auto-liquidation algorithms, but they are held responsible for any losses resulting from this process.

Auto-liquidation provides clear benefits to both client and broker, as it monitors losses in real-time and prevents unexpected margin deficits.

On the other hand, complete automation has its own challenges because a trading algorithm can go awry and cause huge damage.

Also, intra-day market volatility could cause clients' positions to be auto-liquidated on relatively short or no notice.

Yesterday we had more than $600 million of liquidations, when the Bitcoin price rose to $64’000 and then crashed to $58’200.

As the crypto bull market goes in its full force, I expect more volatility and further liquidations causing havoc to trading accounts.

If you would like to talk about liquidations, market making, or liquidity, reply to this email and let me know what you think!