A Closer Look at Recent Market Activity

Recent data on Bitcoin liquidations and leverage levels indicates unique price discovery activity as longs and shorts have been swept from the market. Much of the leveraged positions were shaken out last week as Bitcoin saw volatile price actions around the US market open.

The liquidation chart from CoinGlass below highlights how trading activity on March 5 and 8 around 2.30 pm GMT (US market open) led to heavy liquidations of both long and short positions. A roughly 2% increase was followed by a decrease of over 10% on March 5, which swept the order books and flushed out all leverage down to $60,000.

The subsequent rapid V-shaped recovery saw further leverage positions created around $70,000 and $66,000. The market open on March 8 shook these out, leaving little to no leverage above $66,000.

As of March 11, the drop to $67,000, followed by a surge to new highs around $71,500, has again removed most leveraged positions above $66,000, setting a solid floor. The effect of such movements is that Bitcoin now has free reign for natural price discovery above $66,000.

Unlike the bull market of 2021, which was heavily influenced by highly leveraged positions, the current cycle appears to be shaking out leverage before it has the chance to cause significant volatility. Further, key institutional players and market makers may have a hand in clearing the route for Bitcoin’s price discovery through large-scale trading activities.

The role of market makers in price discovery

Market makers and, more recently, ETF-authorized participants heavily influence financial markets, conducting the flow of buy and sell orders with precision, and are responsible for providing liquidity, which is the lifeblood of any asset’s market. By quoting continuous bid and ask prices, they aim to profit from the spread, but their role extends far beyond mere profit generation.

During periods of high volatility, market makers engage in a strategic maneuver known as “sweeping” the order book. This involves placing many orders at varying price levels to probe the market’s depth and ascertain the true balance of supply and demand. This sweeping action is a probe into the market’s present state and a catalyst for price discovery, revealing the levels at which market participants are willing to transact in significant volumes.

The recent sweep of leverage from the Bitcoin market has profoundly impacted price conditions. With the removal of…