A drop in Bitcoin below $20,000 could trigger large liquidations of leveraged positions, putting more pressure on an asset that has already slumped more than 50% this year, crypto executives said.
Investors are using leverage to short these positions and force prices down in a “battle of leverages,” according to Bobby Lee, chief executive officer and founder of crypto storage provider Ballet Global Inc. This could trigger margin calls for firms that have borrowed against the world’s largest digital token, he said.
“I think we will test $20,000 and go to $19,000-$18,000,” Lee said in an interview with Bloomberg TV on Thursday. “There are lot of funds, large borrowers of Bitcoin who have liquidation positions in $20,000 range.”
A decline in Bitcoin below the key level of $20,000 could snowball into a broader rout in the market that’s already reeling under tightening global liquidity. Bitcoin gained for the first time in 10 days on Thursday after falling to $20,081.95 on Wednesday. The asset has dropped 52.7% this year.
“Given that there is blood in the water and there are sharks swimming around there is going to be lot of incentive for people to trade it down to pass that point for the long holders who are on leverage to capitulate,” Lee said.
‘Short-Term Pain’
Lee’s comments echo concerns from Adrian Przelozny, chief executive officer of crypto exchange Independent Reserve, who said he wouldn’t be surprised if Bitcoin fell to $10,000.
“There’s a lot of Bitcoin pledged as collateral that might have to be sold if its price drops into the $15,000 to $20,000 range,” he said in an interview in Sydney on Wednesday. “But this is short-term pain. I am still very bullish longer term.”
Crypto started sliding late last year on expectations of a less accommodative Fed, with rising interest rates hurting the industry and its prospects. Last month’s collapse of the Terra blockchain and the recent decision by crypto lender Celsius Network Ltd. to halt withdrawals have also put pressure on the market, while a tweet this week from the co-founder of crypto hedge fund Three Arrows Capital fueled speculation that it had suffered large losses.
Lee, who is usually bullish on crypto, also cautioned that the recent rout in cryptocurrencies could be the start of a long bear market.
“A few months ago I was more optimistic, but given that what has happened in the last few weeks I am starting to think that the top was indeed in November 2021 and that we are in the starting of a real bear market, which could last a few years,” he said.
©2022 Bloomberg L.P.
