This May Be Why Crypto Prices Keep Going Up and Down

According to analysts, traders who took excessive risk in the Bitcoin market and were forced to sell when the price went down were the big reason why the crypto dropped 30% last week.

Bitcoin traders liquidated roughly $12 billion in levered positions last week as the price of the cryptocurrency went on a roller coaster, according to bybt.com, a cryptocurrency futures trading platform.

“Selling begets more selling until you come to an equilibrium on leverage in the system,” says JMP’s Devin Ryan.

Other factors to consider are Elon Musk making headlines and China cracking down on cryptocurrency mining.

Bitcoin rebounded to nearly $40,000 on Monday but is still down about 33% from its high.

Brian Kelly, CEO of BKCM, pointed to firms in Asia such as BitMEX allowing 100-to-1 leverage for cryptocurrency trades. Robinhood does not allow traders to use this margin for cryptocurrency, and Coinbase only allows it for professional traders.

“You get this crowd factor — everybody’s liquidation price tends to be somewhat near everyone else’s– when you hit that, all of these automatic sell orders come in, and the price just cascades down,” Kelly, told CNBC.

“Selling begets more selling until you come to an equilibrium on leverage in the system,” said JMP analyst Devin Ryan. That selling begins to “compound” as leveraged positions are liquidated, because they can’t meet those margin requirements, he said.

“Leverage in the crypto markets — particularly on the retail side — has been a big theme that accentuates the volatility,” Ryan added.

“The crypto markets are still in their early days relative to other asset classes and so they’re going through a maturation phase where they are scaling and adoption in increasing, its still relatively nascent. Volatility is a feature here just as the market develops,” Ryan said.