According to Glassnode’s weekly on-chain report, the Bitcoin market faced its most significant single-day sell-off this week, catching Bitcoin bulls off guard. The crash sent BTC prices plummeting below the $25,000 mark, marking a sharp shift from the unusually low volatility witnessed since July.
The catalyst behind this sudden plunge appears to be a deleveraging phenomenon within the futures markets. A staggering $2.5B of open interest was wiped out within a few hours, reflecting a rapid clearing of leveraged positions. The FTX collapse caused a decline of -24.5 % in perpetual futures contracts, wiping out leverage accumulated over July and August.
Options markets, previously exuding confidence with all-time low implied volatility, were forced to reprice volatility premiums drastically due to this abrupt sell-off. Implied volatility surged, doubling for short-dated contracts expiring at the end of September.
Bitcoin Market Vulnerability and Uncertainty
The volatility led to a complete reversal in the 25-Delta Skew, moving from historic lows of -10% to over +10%. Despite this, open interest in both call and put options remained relatively stable, suggesting a lack of forced deleveraging.
A deeper analysis reveals the market’s vulnerability. Over 88.3% of Short-Term Holder supply now rests in unrealized losses, casting a shadow over the market’s recovery prospects.
The price action sliced through crucial support levels, including the 111-day, 200-day, and 200-week moving averages. Such price erosion has left the bulls struggling to regain footing and instilled uncertainty among traders.
As the market suffered an -11.3% weekly drop, it fell short of the long-term one standard deviation move of -12.6%. However, the single-day plunge on Aug 17 marked the daily drop of the year at -7.2%. It surpasses the implied volatility threshold, underscoring the heightened uncertainty that has gripped the market.
This event has also exposed the market’s top-heavy nature, with a substantial portion of spot supply carrying a cost basis above the current price. This structural vulnerability accentuates the market’s sensitivity to rapid price changes. Short-term holder supply in unrealized loss has surged, reflecting the precarious position of many investors.
Divergence of Bitcoin Investor Cohorts
On the other hand, LTHs showed little response to the turmoil, maintaining their positions and increasing their aggregate balances. This divergence highlights the differential behavior of these two investor cohorts in the face of market volatility.
Looking forward, analysts will be monitoring the dynamics of STHs and the responsiveness of the market to potential inflection points. With the Bitcoin market reeling from the flash crash, the road to recovery remains uncertain, raising questions about the resilience of crypto markets.