Disclosure: Delphi Ventures and members of our team are invested in Bitcoin. This statement is intended to disclose any conflict of interest and should not be misconstrued as a recommendation to purchase any token. This content is for informational purposes only and you should not make decisions based solely on it. This is not investment advice.

In my previous Bitcoin post, I covered a few key on-chain metrics illustrating why BTC could continue having positive momentum as we head into the summer. We also cautioned that the market was highly levered going into the Coinbase listing. This update aims to quickly do a rundown on the pullback we saw this weekend.

The bloodbath happened on April 18th with a record ~$9.6b worth of futures contracts liquidated in 24 hours.

Prior to Coinbase’s direct listing event, BTC futures open interest rose to a high of $27.68b on April 14th. After the liquidation event, BTC futures OI currently sits at $21.75b at the time of writing this report.

The hype and excitement around Coinbase’s direct listing helped propel Bitcoin’s price to $65k. Most of the exchange inflows leading up to this event were deposits into futures platforms that offer high leverage. With so much built-up hype for the Coinbase direct listing, it, unfortunately, did not meet retail investor expectations right off the bat. This provided the ideal scenario for fear, uncertainty, and doubt to creep in.

There was excessive demand for leverage evident in the very high futures premia. For context, the BTC-1231 futures contract peaked at $81,900, while BTC/USDT spot traded at $64,801 at the same time. That’s a 26.31% premium (37% annualized).

Source: FTX

With this amount of leverage in the market, a sell-off can have severe cascading effects when flushing out. Based on my findings, the catalysts that triggered the selloff were mostly unfounded FUD circulating around chat groups and Twitter. Examples include US Treasury taking legal action against certain financial institutions for money laundering (fake news), CNBC recirculating news about the India crypto ban (old news since March), and Coinbase executives selling the majority of their shares (grossly misinterpreted).

This sell-off coupled with thinner weekend order books had obvious disastrous effects when forced selling with thin bids further exacerbated the downward price spiral. The cascading effect also led to the first significant derivative backwardation since March 2020. June delivery futures on Binance went as low as $35,000 – most likely due to systemic inefficiencies on Binance (e.g. REN went to $0.0151 on Binance during the flash crash). What’s interesting is, the leverage flush happened within just a 1-hour window.


Source: FTX & Binance – Backwardation on BTCUSDT June Futures on Binance

The backwardation in Binance’s June delivery futures was also quickly arbitraged back very close to spot. During the dump, spot buyers stepped up to the occasion and aggressively bought the dip. This culminated in the highest exchange negative net flow day in 2021.

Source: Glassnode

This liquidation event may have damaged the shorter-term market structure. For example, spot order book depth has reached a recent low point on various exchanges.

Source: Bitcoinity

The mass exodus of leverage from the market can be healthy though. OI has been reset to pre-Coinbase hype levels (i.e. end of March) and funding is close to flat.

The futures curve, as usual, remains in contango. Moving forward, we’ll have our eyes on the correlation between BTC and the stock price of COIN.

Jeremy Ong Calendar
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