Over the past 24 hours, the cryptocurrency market has witnessed a significant increase in liquidations, resulting in the elimination of more than $875 million in leveraged positions, marking the highest liquidation volume since 2021.
Based on data from Coinglass, long liquidations amounted to $702 million, while short liquidations totaled $173 million. These liquidations impacted a total of over 157,000 traders.
Traders who were optimistic about further gains in Bitcoin [BTC] suffered the most significant losses, with long BTC liquidations totaling $416 million. These positions were liquidated following a sudden surge in volatility that caused the price to drop from above $100,000 to $92,000 within a span of four hours.
Altcoins also experienced a slight increase in volatility. Ethereum [ETH] ranged between $3,600 and $3,900, resulting in $85 million in liquidations. XRP [XRP] ranked third in terms of liquidations at $40 million, while Dogecoin [DOGE] saw $22 million in liquidations.
This sudden spike in liquidations and volatility could be attributed to a necessary correction due to excessive leverage causing an imbalance in the market.
Surging Liquidations Stemming from Excessive Leverage in the Market
As per CryptoQuant, Bitcoin funding rates hit a multi-month peak of 0.0663 on December 5th, indicating an increasing dominance of long positions.
Historically, when funding rates reach extreme levels, it typically foreshadows a significant price movement opposite to traders’ anticipated direction.
Consequently, following an accumulation of long positions, a long squeeze occurred, leading to forced selling and a decline in funding rates.
The estimated leverage ratio provides clear evidence of the market correction. This indicator witnessed a notable surge to a seven-day high as traders leveraged more on Bitcoin. It subsequently decreased as overly leveraged positions were liquidated.
MVRV Ratio Indicates Potential for Future Gains
The market value to realized value (MVRV) ratio for Bitcoin reveals that despite the recent correction, BTC has not yet reached its peak valuation.
Presently, the MVRV ratio stands at 2.5, indicating that the asset remains reasonably priced. Over the past three months, Bitcoin’s MVRV ratio has risen from 1.72 as profitability for hodlers has increased.
A surge in the MVRV ratio above 3.5 would indicate that Bitcoin has hit a peak valuation. Therefore, traders should monitor any further increase in this metric towards overinflated levels.