04 Nov 2022

The short squeeze

Massive short squeeze, muted market impact
Source: Coinglass, Laevitas
Last week, crypto derivatives recorded the largest short squeeze since July 26, 2021. In BTC derivatives alone, $330m worth of shorts were liquidated on both October 25 and October 26. The crypto market as a whole experienced $704m and $618m worth of liquidations these days, with ETH perps seeing exceptionally high liquidation volumes on FTX. We’ve long focused on the risks of squeezes. However, this squeeze has had a minimal impact on the BTC price. The July 26 squeeze saw a daily high-low variation of 15% as markets hastily moved up, whereas the October 25 and October 26 moves saw daily high-low variations of 5% and 6%, respectively. Further, momentum has stopped, indicating that traders should brace for longer consolidation if the FOMC does not provide an unlikely surprise pivot. This could indicate: a) an influx of sellers as BTC trades above 20k and/or b) FTX’s liquidation engine impact. FTX’s handling of liquidations may have a softer impact on the market than other offshore venues due to partial liquidations.
Liquidation volumes are higher than reported
The liquidation volume is underestimated. Last year, both Binance and Bybit changed their APIs, restricting liquidation API calls to one push per second, citing that changes were made to create a “fair trading environment”. This has had direct implications on the aggregated liquidation data. We aim to highlight these API restrictions following CZ’s tweet, using the restricted liquidation data and comparing it to more transparent competitors. There are no direct ways to estimate the liquidation volume on Binance or Bybit. However, one may use a back-of-the-envelope approach, looking at how open interest changed over the day. On Binance, ETH OI peaked at 1.87m ETH and declined to 1.5m, down 24%. BTC OI fell from a 205k peak to 180k, down 14%. This is slim compared to FTX’s OI plunge of 34% but still suggests that Binance’s liquidation volume was far higher than the reported 5% of global liquidation volume.
Source: Laevitas
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