On Thursday (May 20), Sam Trabucco, quantitative crypto trader at Alameda Research, shared his thoughts about the reasons for yesterday’s crash in the crypto market that had $BTC trading as low as $30,066 and $ETH trading as low as $1,850 on crypto exchange Bitstamp around 13:10 UTC when the market reached a bottom.
The consensus among crypto analysts seems to be that the crypto market was over-leveraged, that various factors — such as lack of announcements about any major investments in crypto by corporate treasurers (since Tesla disclosed on February 8 that it had invested $1.5 in Bitcoin), concern over Bitcoin mining’s use of fossil fuels (as exemplified by Elon Musk’s recent tweets on this subject), rising inflation in the U.S. leading to the Fed increasing U.S. interest rates, and potential upcoming change in America and China’s regulatory stance on crypto — meant that once some whales started selling yesterday, cascading liquidations across derivatives exchanges, in Trabucco’s words, made “the downturn more intense.”
“The narrative in the winter was clear: institutions were getting into crypto and that’s why crypto rallied so much. This mostly happened in BTC, but the other coins mostly had a beta to BTC so they all rallied some, too.““More recently, the rumors turned to ETH. Now, institutions were getting into ETH, too!”“Many alts reached all-time highs — some for these more fundamental reasons, and some from Elon-related hysteria.”Despite “speculation that the rallies (especially the ETH rallies) were low-leverage and spot-driven,” all the volume was “in derivatives or spot where the exchange allows leverage.”Funding rates for BTC perpetual swaps were “consistently between low + and really quite high + as new contracts got opened.”Despite some people thinking that $ETH was going up over the past few months due to institutional investors buying it on Coinbase, the $ETH price was mostly being driven higher by traders buying “on leverage.”All these leveraged purchases of $BTC and $ETH meant that liquidations were able to turn a small “reversion” into a big reversion.