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Cryptocurrencies saw huge losses on Thursday, with Bitcoin plummeting by over 9% on the day. Many crypto traders are already calling the sudden drop a flash crash. The exact reasons behind this abrupt move lower are somewhat unclear, and various theories are currently circulating regarding what drove the declines.
Losses started during the morning hours on Thursday, as traders began to liquidate crypto derivative contracts in anticipation of the upcoming period of monthly options expiration at the week’s end. The prices of Bitcoin and other cryptos had been gradually decreasing over the past few weeks, which had been pressuring the futures and options markets.
Later in the afternoon, the Wall Street Journal published “preliminary” information about SpaceX’s first-quarter results. SpaceX, a space rocket launch company founded by Elon Musk of Tesla, 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 off.
Crypto Crash May Have Started with Derivatives
Crypto sank into the red on Thursday morning as derivatives traders began liquidating hundreds of millions of dollars in options and futures contracts.
Liquidating derivative contracts like futures and options commonly follows prolonged declines in asset prices. This has been notably true for crypto this week, after the prices of Bitcoin and other digital currencies steadily fell in August.
Until today, crypto prices were seeing a very controlled descent. Each day saw slight price reductions, with no immediate, dramatic shifts occurring in a single session. But the consistent declines have eroded spot prices, resulting in BTC’s decline of more than 7% for August to date.
As prices continue to sag, a large volume of August Bitcoin options contracts are expiring out of the money this week—a term indicating that an options contract has expired without turning a profit.
Expiring out-of-the-money options triggered the liquidation of Bitcoin futures. This has driven a feedback loop where crypto prices fall, options expire unprofitably and futures get liquidated, thereby intensifying the downward pressure on prices.
Why Has Crypto Struggled in August?
Less crypto news this summer has played a role in the price declines.
Following the June announcement that investment giant BlackRock filed for a spot Bitcoin ETF, designed to mirror the actual Bitcoin price rather than relying solely on futures contracts, it initially appeared that crypto was poised for a prosperous summer.
That didn’t happen. Newsflow propels crypto trading, and less news means reduced trading volumes and lower prices. In thinly traded markets, liquidity has diminished.
Let’s return to those out-of-the-money options. Monthly options are slated to expire at the end of this week—a phenomenon known as “options expiration.” Given their lack of profitability, traders have chosen to sell futures contracts to offset their losses.
Although options and futures are often conflated, they are different instruments. Options offer traders the flexibility to buy or sell an asset at a specific price and time, while futures contracts obligate the holder to purchase the asset at a predetermined price on a specific date.
Both categories of positions can be closed prior to their due date, and this is precisely what has transpired with Bitcoin futures over the past 24 hours.
Coinbase To List Bitcoin Futures
In other news, crypto exchange Coinbase was authorized to launch Bitcoin futures trading on its platform.
This marks a significant milestone, positioning Coinbase as the first U.S. crypto exchange with the capability to provide fully regulated cryptocurrency futures to investors, supplementing the existing spot trading activities on the platform.
Shares of COIN have risen about 4% on the news.
This development brings forth an air of excitement among enthusiasts of cryptocurrency.
The Commodity Futures Trading Commission authorized Cboe Global Markets to offer Bitcoin futures contracts in June 2022. Before that, only collateralized contracts for Bitcoin and Ether were accessible through Cboe Digital.
This limitation implied that investors were incapable of utilizing leverage—borrowed funds—to trade Bitcoin or Ether futures on an accredited exchange. However, the favorable ruling for Cboe last June transformed the markets—making today’s pricing action possible.
