– The crypto market has shown some renewed vigor in recent days, but the relief comes too late for many crypto traders.
– Recent data shows that the bear market has liquidated hundreds of thousands of leveraged positions in the past few weeks.
– In an interview with Yahoo Finance, Rick Rieder, CIO of global fixed income at Blackrock, suggested this deleveraging is contributing greatly to the massive drop in the price of bitcoin and other cryptocurrencies.
– Leveraged trading is a practice that allows traders to play the market with borrowed money in order to jack up returns. The problem comes when the value of leveraged securities falls below a certain level, known as the maintenance margin.
– When this happens traders are subject to whats known as a margin call. It forces the trader to add more funds and cover potential losses. If the call isnt quickly met, the broker takes the liberty of liquidating leveraged positions.
– On a higher scale, such deleveraging is often the cause of a sudden and brutal drop in asset prices. Liquidations cause the falling price to feed back on itself. More and more margin calls come in and more assets are sold, sending the price into a tailspin.
– This is whats likely rubbed salt into the crypto wound during the recent rout.
– In a recent tweet, crypto broker Cumberland said, that it saw a record volume of liquidations on June 13.
– That didnt surprise Rieder, who sees deleveraging as a natural market cleansing mechanism after extensive periods of easy money and greed. He thinks we saw a similar washout during the bursting of the dot-com bubble.
– Looking ahead, Rieder believes that this deleveraging will turn out for the better. While it can be devastating to over-extended traders, in the end, it will cleanse the market of dodgy assets and open a new chapter for sustainable innovation.