The cryptocurrency market has experienced a crash, with excessive leverage being a possible main cause

This article is from Shanghai Securities Journal.

The enthusiasm for Coinbase's listing has not waned, but the cryptocurrency market unexpectedly faced a sharp decline over the weekend. Interviewees believe that the high market leverage is the main reason for the volatility in the cryptocurrency market. In addition, the uncertainty of regulatory policies in various countries also poses risks to the crypto market.

Around 11:30 AM Beijing time on April 18, the price of Bitcoin, which was hovering around $60,000, suddenly turned downward, dropping to around $52,000 at one point, with a daily decline of over 15%. As of 8 PM when the reporter filed the story, the price of Bitcoin had rebounded but then fell back to around $53,000. Ethereum dropped from around $2,400 to about $2,000, falling over 10% in the past 24 hours.

Last week, with the listing of Coinbase, the overall cryptocurrency market surged significantly. On April 14, the price of Bitcoin reached a high of $65,747, setting a new historical record. Ethereum also surged above $2,500 during the same period, breaking its historical record as well.

Why did the cryptocurrency market, which had just set a historical high, experience a sharp decline? Interviewees believe that the current high market leverage is the main reason.

An anonymous analyst from the crypto financial service firm PayPal Financial told reporters that the inter-institutional borrowing rates for cryptocurrencies, as recorded by the firm, show that since the end of 2020, as Bitcoin prices have continuously reached new highs, borrowing rates have also risen rapidly, approaching the levels seen during the significant drop in Bitcoin prices in March 2020 by February of this year, indicating that market leverage is at a high level.

"On April 13, the basis in the market was as high as 50%, and the funding rate reached 150%. Once the price of Bitcoin drops, it can easily lead to consecutive liquidations and a sharp decline," the analyst stated.

Gu Yanxi, founder of the U.S. consulting firm Liyuan, holds a similar view. He told reporters that the current price of Bitcoin is mainly determined by derivatives, and once derivatives fluctuate, it leads to even greater volatility in the underlying asset, which is Bitcoin. Therefore, the recent rapid rise and fall of Bitcoin are both results of leveraged operations.

Market news indicates that a large number of stock sales by Coinbase insiders have also triggered fluctuations in market sentiment. According to data from the U.S. data analysis website GuruFocus, insiders at Coinbase sold a total of 12.965 million shares after its listing. Based on the closing price of $344.38 per share last Friday, this amounts to over $4.6 billion.

Among them, Coinbase CEO Brian Armstrong sold nearly 750,000 shares for a total of about $292 million. Coinbase CFO Alesia Haas sold 255,600 shares at a price of $388.73, totaling approximately $99.32 million.

In response, Wan Hui, founding partner of Original Venture Capital, commented on his personal Weibo, stating that "cash-out" is necessary because Coinbase is a direct listing, and only existing shareholders can sell to provide the initial supply; otherwise, there would be no initial liquidity and no way to make a market.

The sharp decline in Bitcoin prices also made it to the trending topics on Weibo that day, as investors once again felt the thrill of the cryptocurrency market. According to statistics from Bitcoin Home as of 8 PM on the 18th, nearly 472,000 people had been liquidated in the previous 24 hours, with liquidation amounts exceeding $6.2 billion. Among them, the largest liquidation occurred on Huobi-BTC, valued at $46.94 million.

Currently, cryptocurrencies still face regulatory uncertainties. The Central Bank of Turkey decided last week to prohibit the use of crypto assets in payments. The central bank stated that crypto assets are not subject to any regulatory or supervisory mechanisms and are not overseen by central regulatory authorities, and their market value may fluctuate excessively; they may also be used for illegal activities.

Federal Reserve Chairman Jerome Powell stated last Wednesday that cryptocurrencies are speculative instruments. Previously, India proposed banning cryptocurrencies and imposing fines on individuals who trade or hold such assets.

Ma Tianyuan, a partner at the crypto asset angel fund Wuwei Investment, told reporters that strengthening regulatory efforts will help eliminate speculative excesses in the cryptocurrency market in the short term, and in the long term, it will benefit the legitimate and compliant development of cryptocurrencies.