Enormous amount of leverage caused a massive dump
Leverage by itself is not a bad thing, but excessive amounts of it can cause a lot of harm. Many markets recently experienced this consequence, including crypto. In the traditional financial markets, the amount of leverage is usually limited to 2x or 3x, whereas in the crypto market, some exchanges offer up to 125x leverage. The amount of leverage in the crypto ecosystem has grown significantly over the last year, and the cumulative size of all Bitcoin leveraged contracts on exchanges peaked at $5.4 billion on 14 February, 2020.
When Bitcoin’s price started collapsing on 12 March, it led to initial liquidations, which forced levered investors to sell their collateral. This pushed the price lower and led to more liquidations and additional losses. In a period of 15 hours, $1.8 billion of leveraged positions were liquidated. Considering the fact that the actual Bitcoin trading volume is less than 5% of the reported volume, it had a massive negative impact on Bitcoin’s price. Over the course of one month, $3.6 billion of Bitcoin leveraged positions were wiped out, leading one to question the value of the enormous leverage offered by many leading exchanges.