The crypto market is notorious for its volatile nature, constantly undergoing significant changes in response to price fluctuations. However, an interesting trend has emerged, highlighting a reduction in volatility due to a shift in investor behavior, particularly within the futures market. By analyzing Bitcoin’s price changes and significant liquidation events from 2021 to 2023, we can observe a noticeable decline in the dollar amounts liquidated per percentage change in Bitcoin’s price. This article will delve into the concept of the Liquidation Sensitivity Index (LSI) and explore the implications of this market behavior.
The Liquidation Sensitivity Index (LSI) is a metric that provides valuable insights into how market participants react to price movements. It is calculated by dividing the total value of both long and short liquidations by the absolute value of the Bitcoin price change percentage. A higher LSI indicates that even smaller price movements result in more significant liquidations, pointing to a high market sensitivity. The LSI utilizes Glassnode data, which tracks crypto native markets such as Binance, OKX, and ByBit derivatives trading.
Traditionally, Binance, OKX, and ByBit derivatives trading platforms dominated the Bitcoin futures market. However, in recent months, the Chicago Mercantile Exchange (CME) has gained considerable ground. While analyzing CME Open Interest would provide a more holistic view of crypto derivatives, historical data limitations restrict the analysis to focus solely on crypto-native markets.
The LSI measures the dollar value liquidated per 1% change in Bitcoin’s price. By examining the chart below, which showcases Bitcoin liquidations from 2021 to the present, we can observe a significant decrease in liquidations since 2021. However, the true impact of this reduction becomes apparent when analyzing the LSI values.
In 2021, the Bitcoin market exhibited high sensitivity to price changes, as evidenced by the LSI values recorded throughout the year. For instance, on January 29, 2021, a 14.24% price increase resulted in long and short liquidations amounting to a staggering $709.31 million, equating to an LSI of $49.81 million USD/%. This pattern of high sensitivity persisted throughout the year, peaking at an LSI of $152 million USD/% on April 18, 2021, following a 14.31% price drop.
In contrast, the year 2023 paints a different picture of the market’s reaction to price changes. The sensitivity to liquidations decreased significantly. For example, on January 14, 2023, even with a substantial price increase of 7.33%, total liquidations amounted to $145.84 million, resulting in an LSI of $19.89 million USD/%. This trend of reduced sensitivity continued, with an LSI of just $12.32 million USD/% observed on December 5, 2023, following a 5.17% price rise.
When comparing the average LSI values for 2021 and 2023, a significant difference emerges. In 2021, the average LSI stood at a high of $74.27 million USD/%. In stark contrast, the average LSI for 2023 plummeted to a much lower $18.93 million USD/%. Consequently, since 2021, there has been a dramatic reduction of $55 million (77%) in liquidations per percentage point change in Bitcoin’s price.
As of today, December 11, the LSI continues to reflect this trend, with Bitcoin experiencing a 5% price change and total liquidations amounting to $85.4 million. The calculated LSI stands at $16.44 million USD/%, indicating that for every 1% change in Bitcoin’s price, the market reacts with approximately $16 million in liquidations. This LSI value suggests that Bitcoin futures have become slightly more sensitive to price movement compared to earlier in the month.
Several factors could explain the decrease in liquidation sensitivity observed in recent years. The crypto market, especially Bitcoin, has matured significantly since 2021. Investors and traders have likely adopted better risk management strategies, becoming less reactive to price changes. Additionally, the entry of more institutional investors and the development of sophisticated trading tools could have contributed to a more stable market environment. The rise of CME as the dominant futures trading platform in 2023, surpassing Binance, is also a significant factor in this market shift.
The comparative analysis of Bitcoin’s liquidation sensitivity in 2021 and 2023 reveals a marked shift in market dynamics. The reduced value of liquidations per percentage point change in Bitcoin’s price in 2023 reflects a maturing market and potentially indicates a more stable and less speculative environment. These insights are crucial for investors and traders, suggesting a shift towards a more resilient market that can better withstand price volatility.
The crypto market is witnessing evolving dynamics, with changes in investor behavior and market composition leading to a decrease in liquidation sensitivity. By examining the Liquidation Sensitivity Index (LSI), we can observe a significant decline in the dollar amounts liquidated per percentage change in Bitcoin’s price. This trend signifies a maturing market and points towards a more stable and less speculative environment. Understanding these changes is vital for investors and traders seeking to navigate the ever-changing landscape of the crypto market.