Binance Futures March Trading Report: Liquidity Crunch Drags Down Crypto Markets

Quick Takes:

• A widespread sell-off in mid-March triggered a record amount of liquidations as Bitcoin experienced one of the most volatile conditions in recent times.

• Trading activity in spot and futures markets surged - data suggests that investors have invested more money into spot markets, capitalizing on the opportunity to accumulate crypto assets at bargain prices.

• The sudden drop in Bitcoin’s price resulted in a long squeeze, which in turn added to the downward pressure around the cryptocurrency and eventually drove prices to depressed levels. 

• The Relative Strength Index indicated that prices have plunged into extremely oversold territory, as the indicator marked its lowest value since November 2018.

March was an unforgettable month for crypto markets. Cryptocurrency investors were hit particularly hard as most major crypto assets lost more than 20% in value in March. Many investors, traders and even exchanges have yet to recover from the capitulation that triggered almost $1 billion in liquidations.

Concerns over the economic impact of COVID-19 have caused a freefall in global equity markets and oil prices, which then triggered a global liquidity crunch. Consequently, the liquidity stress has caused a drag on cryptocurrencies as well. In a recent article, we analyzed how the crypto market sell-off has impacted exchanges.

Bitcoin was especially hard-hit, suffering a 40% drop as liquidity evaporated. The rapidly falling prices triggered a tsunami of liquidations, creating a feedback loop that drove prices even lower. 

As a result, Bitcoin experienced one of the most volatile conditions in recent times. BTCUSDT on Binance Futures navigated from its high of $9200 to a low of $3600 throughout an unstable March.

Chart 1 - Historical daily returns of BTC

Source: Binance Futures

Evidently, the sell-off was one of Bitcoin’s worst trading days in recent years. The crash of March 12 was by-far its worst since 2018, which led to a sharp rise in volatility. Bitcoin's 30-day rolling volatility hit a 1-year high in March, surpassing the volatility levels last seen in July 2019. 

Chart 2 - Historical volatility across macro assets

Source: Skew

As shown, BTC volatility levels increased dramatically since March 13, surpassing its high in July 2019 and remained above 150% throughout March. In comparison, Bitcoin experienced larger volatility than traditional assets such as Gold (XAU) and the U.S stock market (SPX). 

BTC’s volatility surged drastically in mid-march and rose sharply, which suggests that investors were caught off-guard as panic selling entered the market. Even as Bitcoin recorded its worst trading day in recent times, many crypto exchanges reported a record-breaking month in volume as volatility provides ample opportunities for traders and investors.

Spot volumes inched higher against futures 

The severe plunge on March 12 drove all-time high volumes in spot and derivatives markets. While both markets saw a surge in trading activity, data indicates that investors have invested more money into spot markets, capitalizing on the opportunity to accumulate crypto assets at bargain prices.

Chart 3 - Futures to spot volumes in March

Source: Binance Futures

The volume ratio between futures and spot markets displayed a sharp dip during the crash. This suggests that investors took the opportunity to buy crypto assets on the spot markets to hold for the long-term. BTCUSDT futures to spot ratio fell from 3.11 to 2.31. In similar fashion, the ETHUSDT ratio fell from 1.99 to 1.17, and the BCHUSDT ratio fell from 1.69 to 1.21.

Since late March, the price of Bitcoin has risen steadily after its price was supported at the $6,000-mark. Consequently, the ratio for BTCUSDT recovered back to 3.99, however, ETHUSDT and BCHUSDT did not experience a similar recovery as ratios remain low throughout the remainder of the month. The increase in spot buy-volume essentially led to a shift in the market, allowing Bitcoin to recover without severe pullbacks and with relatively low volatility.

Traders capitalized on arbitrage opportunities

Funding rates, which reflect the price difference between spot index and futures prices, widen as much as 700% due to panic selling and long-liquidations, which drove futures prices lower than the spot index. Consequently, funding rates turned negative. In such cases, traders who hold short positions incur a premium that is seven times larger than its historical mean.

Chart 4 - Daily funding rates in March

Perpetual futures prices vary widely across different crypto exchanges due to the extreme volatility during this period. As such, it presented an opportunity for traders to arbitrage between exchanges. For instance, a trader could open a long position in a perpetual contract that offers the largest premium and simultaneously open a short position in a perpetual contract with the lowest premium. 

Traders trapped in a long-squeeze

BTC’s sudden price drop resulted in a long squeeze, which in turn added to the downward pressure around the cryptocurrency and eventually drove prices to depressed levels.  

While both long and short positions were liquidated, 90 percent of the liquidations are of long positions. It indicates that leveraged positions were heavily skewed to the bullish side, this was no surprise as the broader crypto market had been on a bull run since the start of the year. 

Chart 5 - Daily net change of the total number of open positions 

Source: Binance Futures

Binance Futures saw more than 50% of its open positions being closed, which coincides with the decline in open interest. In the subsequent days after the sell-off, open interest and the total number of positions recovered back to prior levels as traders opened new positions to capitalize on market volatility.

Are crypto-markets oversold? 

Since the crash, crypto markets have recovered by 50%, and in particular, BTC has made a V-shaped recovery and rallied more than 70% from its lows. At the time of writing, BTC trades above a well-supported $6000-mark. However, many are still wondering if BTC and the broader crypto market are still oversold. Here, we analyze the relative strength index (RSI) to identify oversold conditions in BTC.

The relative strength index (RSI) is a well-known indicator that evaluates overbought or oversold conditions in the price of an asset. The RSI is displayed as an oscillator and can have a reading from 0 to 100.

Chart 6 - BTC historical prices and RSI levels

Source: Tradingview

From the chart, we observed a plunge in the RSI to a low of 15 on March 12, which suggests extreme bearish sentiments on BTC. The RSI also indicated that prices have fallen to extremely oversold territory during this period. In fact, the indicator marked its lowest value since November 2018.

Today, RSI has crossed above 50 as BTC prices recovered more than 70% from its lows. A sustained RSI reading of above 50 would indicate a strong upward momentum, while continuous readings below the threshold would suggest that more downside pressure is yet to come.

Traders should monitor critical resistance and support levels to identify the next big move in BTC. For instance, key resistance levels such as the $9000-mark, where a clear breakthrough would indicate that the crypto bull market is back on track. Otherwise, key support levels at $6000 would be a turning point to support any sustained upside momentum on BTC. 

Markets are a weighing machine in the long-term

The sell-off in March presented plentiful opportunities for long-term investors to accumulate Bitcoin and other major cryptocurrencies at discounted prices. Long-term investors often express their belief and confidence that Bitcoin can revolutionize the financial system in the future. Thus, the potential to generate significant returns over the long-term.

Long-term holders are believers in its technology and are immune to price volatility. As such, investors could continue to accumulate undervalued Bitcoins in the interim because it is still viewed as a hedge against the current global macro environment.