Some individuals become complacent when they understand that crypto is here to stay according to Krug. As a consequence, they get up on it, assuming that it can’t go down that far when companies are going to swoop in and buy, saving the day. But finally, as the lid blows off and bids are not there, the market will be pushed down by leveraged long liquidations.
More than USD 3bn worth of long positions were liquidated after the market collapse on January 10-11, according to data from bybt.com. To comparison, on January 12, short positions worth over USD 200 m and also more than USD 200 m long were liquidated.
According to cryptonews.com, crypto researcher and analyst Willy Woo argued that “unlike previous crashes in the past 2 years, where over-leveraged markets lead by trader liquidation, this one started on spot markets, then was greatly amplified by a single exchange partially failing, yet did not turn itself off for the good of the ecosystem.”
Leveraged investing applies to borrowing funds so that you can obtain a bigger role with your current funds than you will be able to, so that you can produce a greater profit opportunity. However, while margin trading helps traders to maximize their profits, it may also lead to higher losses and liquidations, which is why experienced traders prefer to warn beginners to stay away from leveraged trading.
As for Pantera Capital itself, when the Market Value to Realised Value (MVRV) ratio rose to its highest level since 2017 a few days ago, the company took some risk off the table. The data depicts how much bitcoin investors are sitting on for unrealized gains. It means the market is overheated when this metric gets big, and once it begins to fall, people sell in order to lock-in profits out of desperation or fear, Krug explained on the call.
According to Krug, this recent crash was a healthy outcome for this region, noting that in a consolidation phase, people realized some profits and the market pulled back a bit.