Bitcoin Matches FTX-Era Liquidation Levels: A Potential Opportunity Awaits

Bitcoin's recent liquidation levels are reminiscent of the FTX collapse, yet this downturn stems from an over-leveraged market rather than deceit or an exchange failure.

Key Takeaways

Bitcoin has reached liquidation levels similar to the FTX collapse, primarily driven by excessive market leverage.
Unlike the FTX collapse caused by fraud, this downturn results from normal market dynamics resulting in forced liquidations.
Historically, deleveraging phases can present valuable medium-term investment opportunities.
Spot trading has increased, suggesting genuine buyer interest rather than reliance on borrowed funds.
Despite opportunities, caution is necessary as many traders still lack essential knowledge in risk management.

Some analysts believe that such leverage flushes often create significant medium-term investment opportunities, even amid ongoing risks and uncertainties characteristic of late market cycles.

Understanding the Cause of the Liquidation Wave

Bitcoin has reached liquidation levels not seen since the FTX crash; however, the cause is not linked to an exchange's failure or fraudulent activities. Instead, the shocking downturn originates from a market heavily weighed down by leverage, a situation that developed subtly over months before erupting dramatically.

“The level of leverage in the market has never been this high. While open interest peaked at $16.5 billion in 2021, it skyrocketed to $47.5 billion in this cycle—three times greater,” explained Darkfost, a market analyst speaking to BeInCrypto. This surge illustrates just how aggressive investors have become during this market cycle.

Liquidations happen when highly leveraged traders can’t sustain their positions after prices turn against them. When leverage is widespread, even minor drops can trigger substantial automated sell-offs.

🚨 BTC LONG LIQUIDATIONS HAVE REACHED LEVELS NOT SEEN SINCE THE FTX CRASH.

Despite Bitcoin's recent correction, many investors attempted to time the market's bottom and go long on BTC. A significant buildup of positions contributed to a high level of long liquidations…

This week showcased exactly that scenario. Billions of dollars in open interest had accumulated across various exchanges, making the market sensitive to any significant downturn. As Bitcoin's price dipped, the pressure released, resulting in a cascade of forced liquidations, with each triggering the next.

“This all-time high in open interest occurred just before the events of October 10, leading to a series of major liquidations that drove heightened short-term volatility,” Darkfost noted.

The speed and scale of this market rout drew immediate comparisons to the FTX collapse.

Potential Recovery Following the Liquidation

Currently, liquidation totals mirror those from November 2022, with over 9,000 to 10,000 BTC erased in a single day. However, that’s where similarities end.

In 2022, the market faced a downfall due to fraudulent practices and a major exchange's failure. In contrast, this latest crash is attributed to excessive leverage and standard market dynamics, which is a significant distinction.

This shakeout does not indicate a structural failure in the market. Instead, it showcases overzealous positioning and a crowded derivatives market. While the unwind was severe due to extreme leverage, once this excess is cleared, the outlook can improve.

“Historically, phases of deleveraging tend to create solid medium-term opportunities, similar to what followed the FTX crash… which marked a turning point in the bear market,” Darkfost observed.

Moreover, funding rates recently turned negative—a sign indicating that traders are stepping back from highly bullish leveraged bets. Open interest has eased and hasn’t rebounded quickly, reducing the risk of additional rapid sell-offs.

Simultaneously, spot trading experienced a surge—one of the strongest days recorded this year—indicating that genuine buyers, rather than borrowed funds, were entering the market.

“A market that rebuilds itself on spot trading after a leverage flush is a positive sign for potential market bottom formation. This type of signal is precisely what you hope for after a liquidation event,” added Darkfost.

This scenario may signal the opening of a window of opportunity.

Proceed with Caution in a Cleaner Market

When substantial leverage is eliminated, the market often becomes more stable. However, Darkfost emphasized the importance of understanding why these events can turn so violently.

Such occurrences highlight an ongoing issue within the crypto landscape: many traders are still not adequately equipped with essential risk management skills.

“People need a solid foundation in risk management principles. The crypto market remains loosely regulated and highly accessible, allowing traders to operate with extreme leverage amid substantial capital," he noted, adding, “If an investor lacks a clear methodology for managing risk, they can face severe losses. The greater the leverage, the shorter a trade’s lifespan.”

With these warnings in mind, Darkfost also indicated that the broader market conditions are not straightforward.

“Given the current context, it's essential to consider that we may be reaching the end of the cycle for those who adhere to this cyclical theory. The overarching macroeconomic picture is still unclear, and other issues are emerging, such as potential insights by MSCI into treasury-heavy companies like MSTR.”

Recognizing these risks can help bring historical trends into focus. After excessive leverage is expunged, markets tend to revert to a healthier state. Following the FTX collapse, a similar reset marked the end of the bear market and the beginning of a prolonged recovery phase. A comparable scenario may be unfolding again, but with additional nuances and variables to consider.