No-hype conversations about crypto and blockchain.
"If you don't bet, you cant win. If you don't have money, you can't bet."
- Larry Hilt

What a wild weekend. If you survived, congratulations, that is the most important thing you can do. You can't win in this market with no money, and the name of the game is to survive.

The ones who are patient will win.

A Bear Winter? Not really.

Over the weekend we saw Bitcoin's recent rally above $60,000 collapse, posting a $10,000 drawdown in a span of hours, hitting its floor of around $52,000.

Sirens went off as new and veteran speculators alike shouted "Bear Winter!" from every corner of the internet, everyone scrambling to figure out what the hell just happened.

So what did just happen?

To explain the phenomenon that took place over the weekend we need to explain two very important things:

  1. Hash Rate
  2. Leverage

Hash Rate

The Bitcoin hash rate is the amount of computing power in the Bitcoin network working towards solving block puzzles and processing transactions.

The Bitcoin hash rate has been studied in-depth by speculators and researchers alike as the asset continues to obtain global adoption. It is important to understand the dynamics and economics around Bitcoin in order for financial institutions to make complete due-diligent investments.

As it stands, there are two main groups, the price-follows-hash (PFH) group and the hash-follows-price (HFP) group.

PFH believes that when miners become more involved with the network due to exo-incentives, and therefore hash-rates go up, it signals Bitcoin is healthily progressing. This signals investors that demand for Bitcoin may be going up and incentivizes them to purchase Bitcoin. The price therefore follows the hash-rate.

HFP believes that when the price of Bitcoin goes up due to exo-incentives the hash rate lags behind as it becomes more profitable to mine Bitcoin. Therefore the the hash-rate follows price.

The reality is there isn't enough data from the last 10 years to adequately discern which one of these groups is right, or if neither are. For the time being speculation will drive the markets.

With that being said, it's my observation that the speculators who subscribe to the PFH belief tend to spike during bull markets and speculators who subscribe to HFP belief tend to spike during bear markets.

In a bull market, speculators are constantly looking for sell signals, and advanced traders can use this for exploitation.

In a bear market – as long as an assets fundamental value holds true – speculators are constantly looking for buy signals, and advanced traders can use this for exploitation.

In conclusion, without more data to stress-test hard computational research across different models it is safe to assume hash rates affect the psychology of speculators rather than having a direct correlation to Bitcoin prices.


Leverage is the ability to use borrowed capital from brokers to magnify profit potential. Leverage works the same way in reverse as well, and can magnify loss potential in the form of liquidation.

Liquidation is denominated by a percentage, that when hit, will automatically close your position as to avoid further substantial losses.

Leverage can be used in futures, options, and perpetual contracts, which are all forms of derivatives trading; a form of trading introduced to Bitcoin in December of 2017. Some say the introduction was the impetus for the beginning of the Bitcoin bear market in 2018.

  • Futures are the obligation for a trader to buy or sell at whatever price the asset is on a specific date, unless their position is forced to close before that specific date.
  • Options are the right (but not the obligation) to buy or sell an asset at any price within the life of the contract.
  • Perpetual contracts are the same as options, but with no expiration date.

Some exchanges allow you to take positions in these contracts using leverage. To calculate leverage, though, we need to know what margin is: margin is the collateral a broker needs for you to borrow capital to make leveraged trades.

A broker will give you an initial margin rate for certain assets within their exchange associated with certain maximum position sizing.

The calculations for these are as follows:

  • Notional size = n
  • Margin = n(1 / (leverage * 100))
  • Leverage = 1 / initial margin rate

Now that you understand the power of leverage and how it actually works, you need to also understand how dangerous they can be if your trade goes south.

Let's say we use the table above and we want to take a $16.5M dollar long position with a BTCUSD perpetual contract with a mark price of $50,000/BTC. We fall within the 10x leverage row because our notional size falls within $10M and $20M. That means we have a 10% initial margin rate.

Lets figure out what our margin is then:

  • Our Notional Size: $16.5M = n
  • Our Margin: 16,500,000(1 / (.1 * 100)) = $1,650,000
  • Our Leverage: (1 / 10) = .1 (or 10%)  

This means we need $1,650,000 dollars in our account to be able to take a $16.5M dollar position. Perpetual contracts have a maintenance margin rate as well, which is dynamically set based off the underlying asset's price. This differs, but let's say that within this scenario the maintenance margin is 7.5%.

This effectively means that our long position at $50,000 dollars will be liquidated if the price of BTC drops 7.5% or past $46,250. This will cause our $1,650,000 to be completely wiped out.

Now that we understand both hash rate psychology and leverage positions, let's combine what we have learned to explain what happened this weekend.

The Weekend Explained

The hash-rate for Bitcoin had been falling off as early as April 11th. This is partially due to the bi-weekly increase of hash difficulty.

During that exact time, futures contracts (as we learned above, have an expiration date and can be closed before that expiry date) are set to expire at the end of April. Those contracts were open since November of 2020. For those that are in profit or at a loss, most can estimate their PnL (profit-and-loss) and close positions within the last 15-20 days.

These traders who participate in futures contracts are sophisticated, and they are exactly the type of people who look to exploit speculators who subscribe to the PFH mentality (that prices follow hash-rates).

When hash-rates began dipping on the 11th, and traders who noticed the market didn't rally as hard as most thought following the Coinbase listing, they decided to start offloading positions as the market was overheated.

At the same time, a little place in China called Xianjang, suffered a power outage. Xianjang is coincidentally home to one of the largest mining operations in the globe. Even more coincidentally, a deposit of 9,000 BTC was deposited into Binance (an exchange that does large volume in Asia) just before the power outage and just before the hash rate collapse.

If you combine these things together, you can put massive pressure on the sell side of Bitcoin causing prices to fall. This savvy investor who understands the PFH mentality in a bull market was able to capitalize.

Once the hash rate collapsed, many investors rushed to sell their Bitcoin as they were incentivized to look for sell signals – and they got one. This caused the price of Bitcoin to drop sharply.

Now, remember how liquidations work? At a certain price a position becomes liquidated. Most investors set their liquidation long price just below $60,000, as $60,000 could serve as a psychological support zone.

The confluence of events that lead to the sharp decline in prices also set off all those liquidation prices, likely below the $60,000 dollar zone, setting the record for most liquidations in a 24 hour period in history (in accounts total and value total).

BTC longs that got liquidated

Now that all those longs got liquidated automatically, the retail market starts to take notice and panic sells, because they too are also looking for sell signals but aren't yet sophisticated enough to look at anything more than price action.

Now price starts to absolutely tank because everyone is selling.

That is how we got a nasty weekend sell-off. That isn't to say that the market wasn't entirely overheated. It was, and a correction was needed regardless. The combined events described above acted mainly as a catalyst.

Bitcoin needs to teach people a lesson about leverage. I think we go down some more and start establishing support on the longer timeframe moving averages. This would be healthy and pretty much confirm Bitcoin reaching new all time highs this bull run.

It also means....


And I mean actual altseason, because people have been screaming for it forever. This would be the first time Bitcoin falls to major support zones and takes time to accumulate.

My take: get ready for alts to take off if Bitcoin does indeed drop lower.

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