Bitcoin now 77% less sensitive to liquidations than 2021 signalling market maturity

The crypto market is well known for its volatility and has undergone significant changes over the years, particularly in its response to price fluctuations.

However, a less obvious observation is the reduction of this volatility due to a change in investor behavior, notably within the futures market. An examination of Bitcoin’s price changes and the most significant liquidations in 2021 and 2023 reveals a pronounced decline in the dollar amounts liquidated per percentage change in Bitcoin’s price.

Bitcoin Liquidation Sensitivity Index.

Central to this analysis is the concept of CryptoSlate’s Liquidation Sensitivity Index (LSI). This metric, calculated as the total value of both long and short liquidations divided by the absolute value of the Bitcoin price change percentage, offers a window into how market participants react to price movements. A higher LSI indicates that smaller price movements result in more significant liquidations, a tell-tale sign of market sensitivity.

The LSI utilizes Glassnode data, which tracks crypto native markets including Binance, OKX, and ByBit derivatives trading. These exchanges historically made up the majority of Bitcoin futures trading; however, in recent months, CME has begun to gain considerable ground. Analysis of CME Open Interest would give a more holistic view of crypto derivatives to include traditional markets. However, due to limitations in historical data comparisons, the LSI focuses solely on crypto-native markets.

LSI is essentially a measure of the dollar value liquidated per 1% change in Bitcoin price.

The chat below showcases the Bitcoin liquidations from 2021 to the present, with the orange line representing Bitcoin price and red and green showing short and long liquidations, respectively. While it may be transparent to see that liquidations have decreased significantly since 2021, the LSI reveals the true impact of this reduction.

Below are the most notable liquidation events from 2021 and 2023 for comparison.

2021

In 2021, the Bitcoin market exhibited high sensitivity to price changes. This is evident from the LSI values recorded throughout the year. For instance, on Jan. 29, 2021, a price increase of 14.24% and long and short liquidations caused a staggering $709.31 million, resulting in an LSI of $49.81 million USD/%. This pattern of high sensitivity persisted throughout the year, with the LSI peaking at $152 million USD/% on April 18, 2021, with a price drop of…