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Bitcoin merchants who leverage as much as 100 to 1 are driving the wild swings in cryptocurrencies

A bitcoin logo displayed on a smartphone with stock market percentages in the background in this illustration dated April 26, 2021.

Omar Marques | SOPA pictures | LightRocket | Getty Images

Bitcoin's aggressive moves are being driven by far more than the next crackdown on China or the headline from Elon Musk.

Traders who take undue risk in the unregulated cryptocurrency market and are forced to sell when prices fall were largely responsible for the 30% drop in prices and failures at major exchanges last week, according to analysts. A burgeoning bitcoin credit market is also adding to the volatility.

The price of cryptocurrencies fell last week, and Bitcoin has lost about a third of its value in a matter of hours. Bitcoin rose to nearly $ 40,000 on Monday but is still 33% below its high.

When traders use margins, they are essentially borrowing from their brokerage firm to take a larger position in Bitcoin. When prices go down, they have to pay back the brokerage firm in what is known as a "margin call". As part of this, there is often a set price that triggers the sale to ensure traders can repay the exchange.

Brian Kelly, CEO of BKCM, pointed out companies in Asia like BitMEX that enable 100-to-1 leverage for cryptocurrency trades. Robinhood doesn't allow traders to use margins on cryptocurrency, and Coinbase only allows professional traders.

"You get that crowd factor – everyone's liquidation price is usually close to everyone else's price – when you hit that, all these automatic sell orders come in and the price just goes down," Kelly told CNBC.

Bitcoin traders liquidated around $ 12 billion in leverage positions last week when the price of the cryptocurrency skyrocketed, according to This mass exodus wiped out approximately 800,000 crypto accounts.

"Selling makes more selling until you strike a balance in terms of leverage in the system," said JMP analyst Devin Ryan. That sale begins to "tighten up" when leveraged positions are liquidated because they can't meet those margin requirements, he said.

"Leverage in the crypto markets – especially in retail – has been a big issue adding to volatility," added Ryan.

As the crypto market expands, Ryan believes that leverage will have less of an impact, especially as more institutional capital comes in.

Both retail and institutional investors invested in Bitcoin and other digital assets in 2021. The world's largest cryptocurrency exchange – Coinbase – said its trading volume in the first quarter of the year was $ 335 billion, of which around $ 120 billion was for retail customers and $ 215 billion was institutional. The trading volume was around $ 30 billion in the first quarter of 2020.

Mark Cuban discussed the leverage aspect for ether, the second largest cryptocurrency in the world
Twitter last week.

"De-levered markets will be knocked down. No matter what the asset is. Stocks. Crypto. Debt. Houses. They bring forced liquidations and lower prices. But crypto has the same problem that [high-frequency traders] stocks bring. Front-running is legal, since gas charges add latency that can be played, "Cuban said in a tweet last week.


The other reason behind the behind-the-scenes selling could be the growing bitcoin credit market.

Crypto companies like BlockFi and Celsius allow Bitcoin holders to store their crypto with the company for an interest rate between 6% and 8%. In the backend, these companies lend Bitcoin to hedge funds and other professional traders. They also allow people to use their bitcoin holdings as collateral for loans.

For example, if someone took out a $ 1 million bitcoin-backed loan and the price dropped 30%, they could owe the lender 30% more.

"When you reach a certain level of collateral, companies automatically sell your bitcoin and send the collateral to the lender," said Brian Kelly of BKCM. "This adds to the massive cascading effect – there was so much volume that most exchanges broke."


The fact that Bitcoin is not regulated by a central bank is part of what makes it so valuable to its investors.

But the lack of central authority and increasing adoption have put a target on some in Washington. Treasury announced Thursday that any transfer in crypto worth $ 10,000 or more must be reported to the Internal Revenue Service.

"The market doesn't have the same setbacks as other more traditional markets," said Ryan. "In some ways, the crypto markets are cleaner and not influenced by a last resort buyer."

Still, Ryan said that regulation can be viewed as validating the crypto market and could have a positive impact on the digital asset.

"The crypto markets are still in their infancy relative to other asset classes and are therefore in a maturation phase where they are being scaled and increasingly rolled out." Volatility is a characteristic here as the market evolves, "Ryan said.

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