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Why are cryptocurrencies falling today? – Forbes Advisor
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Cryptocurrencies posted huge losses on Thursday, with Bitcoin plunging more than 9% on the day. Many cryptocurrency traders are already calling the sudden collapse a flash crash. The exact reasons behind this sharp downward movement are unclear and various theories are currently circulating as to what caused the declines.
The losses began during the morning hours of Thursday, as traders began liquidating cryptocurrency derivatives contracts in anticipation of the upcoming monthly options expiration period at the end of the week. Prices of Bitcoin and other cryptocurrencies have gradually fallen in recent weeks, putting pressure on the futures and options markets.
Later in the afternoon, The Wall Street Journal published “preliminary” information on SpaceX’s first-quarter results. SpaceX, a space rocket launch company founded by Tesla’s Elon Musk, is a dominant player in the space launch industry.
Among other details, the report stated that SpaceX had written down its Bitcoin holdings in the quarter and subsequently sold them.
The collapse of cryptocurrencies may have started with derivatives
Cryptocurrencies plunged into the red Thursday morning as derivatives traders began liquidating hundreds of millions of dollars in options and futures contracts.
Liquidation derivative contracts how futures and options commonly follow prolonged declines in asset prices. This was especially true for cryptocurrencies this week, after the prices of Bitcoin and other digital currencies fell steadily in August.
To date, cryptocurrency prices have seen a very controlled decline. Slight price reductions occurred every day, with no immediate and dramatic changes occurring in a single session. But the consistent declines have eroded spot prices, resulting in BTC falling more than 7% from August to today.
As prices continue to fall, a large volume in August Bitcoin options contracts expire out of the money this week, a term meaning that an options contract has expired without making a profit.
The expiration of out-of-the-money options triggered the liquidation of Bitcoin futures. This has triggered a vicious cycle in which cryptocurrency prices fall, options expire profitlessly, and futures liquidate, thus intensifying the downward pressure on prices.
Why did cryptocurrencies struggle in August?
Less cryptocurrency news this summer has played a role in the price decline.
After the investment giant’s June announcement BlackRock has filed for a spot Bitcoin ETFdesigned to mirror the actual price of Bitcoin rather than relying solely on futures contracts, it initially looked like the cryptocurrency was poised for a prosperous summer.
This did not happen. News flow stimulates cryptocurrency trading, and less news means reduced trading volumes and lower prices. In thinly traded markets, liquidity has declined.
Let’s get back to those out-of-the-money options. Monthly options are scheduled to expire at the end of this week, a phenomenon known as “options expiration.” Given the lack of profitability, traders chose to sell futures contracts to offset losses.
Although options and futures are often confused, they are different instruments. Options give traders the flexibility to buy or sell an asset at a specific price and time, while futures contracts force the holder to buy the asset at a predetermined price on a specific date.
Both categories of positions can be closed before the expiration date, and this is exactly what has transpired with Bitcoin futures over the past 24 hours.
Coinbase quotes Bitcoin futures
In other news, Coinbase cryptocurrency exchange has been authorized to launch Bitcoin futures trading on its platform.
This marks a significant milestone, positioning Coinbase as the first US crypto exchange with the ability to provide fully regulated cryptocurrency futures to investors, complementing the platform’s existing spot trading activities.
COIN shares rose about 4% on the news.
This development raises an air of excitement among cryptocurrency enthusiasts.
THE Commodity Futures Trading Fee authorized Cboe Global Markets to offer Bitcoin futures contracts in June 2022. Prior to that, only collateralized contracts for Bitcoin and Ether were accessible through Cboe Digital.
This limitation meant that investors were unable to use leverage, i.e. borrowed funds, to trade Bitcoin or Ether futures on an accredited exchange. However, the ruling in favor of Cboe last June transformed the markets, making today’s price action possible.