Exposed: The Real Impact of Crypto Liquidations

The post Exposed: The Real Impact of Crypto Liquidations appeared first on Coinpedia Fintech News

The crypto market cap, spearheaded by Bitcoin (BTC), fell nearly 3% in the past 24 hours, settling around $2.11 trillion early September 2. Bitcoin, which ended last month below the key $58k-$60k support zone, started September on a down note, dropping 3% to about $57,343. Amid the increased volatility, over $161 million was liquidated from leveraged positions on the last day, with long traders taking the brunt of it. 

Recent findings from K33 Research, led by Vetle Lunde, reveal major exchanges like Binance, Bybit, and OKX have adjusted their liquidation reporting since 2021. This change has led to understating actual liquidation volumes, raising questions about data reliability. 

What’s going on?

Lunde’s research points out that the true scale of liquidations is much worse than current data shows. Traditionally, exchange liquidation data is used to gauge market risk and leverage ratios. However, if these numbers are inaccurate, traders may base their decisions on a distorted view of market dynamics. This misrepresentation could lead to inadequate risk management and a skewed understanding of market volatility.

Exchanges previously reported every individual liquidation, providing a comprehensive view of the market. However, they now report only a fraction of these events, leading to the current data showing just one liquidation per second instead of the actual frequency. This significant reduction in reported events creates a misleading picture of market conditions.

Lunde speculates that exchanges might be manipulating data for several reasons. One possibility is that exchanges want to manage their public image or maintain a competitive advantage. Limiting the data they provide may preserve an informational edge for themselves or their affiliated investment firms.

Moreover, Liquidation data is a critical tool for traders and analysts. It helps in understanding leverage and the impact of sudden market volatility. For instance, during significant events like Crypto Black Monday on August 5, when Bitcoin briefly fell below $50,000, accurate liquidation data could shed light on how well leverage was cleared from the market.

If the reported data is flawed, traders may not fully grasp the extent of leverage and risk, potentially leading to poor decision-making. Monitoring open interest—another measure of the value of outstanding crypto derivatives—could help. Still, it might not fully reflect the nuances of leverage or new positions opened during volatile periods.

Despite the concerns, recent data from Coinglass shows a massive 56,958 traders liquidated over the past 24 hours, with a total of $156.7 million in liquidations, mostly from long positions. However, concerns about data accuracy persist since these figures come from major exchanges, which might not fully reflect the market’s true state. 

Do you think such alterations can impact the crypto traders and market negatively?