Market Analysis

The Build-Up

The cost of leverage in the crypto market has decreased significantly since the 10-10 crash. Funding rates, which represent the cost of holding long positions, have decreased from 8% to 7.1% on Deribit and from 8% to 8.1% on Binance and Bybit. This decrease in funding rates suggests that the market is less crowded on the long side.

The Catch

However, the decrease in funding rates is not enough to completely eliminate the risk of a repeat of the 10-10 crash. The market is still rebuilding leverage, and the pressure behind the crash is missing. The current leverage levels are similar to those before the 10-10 crash, with Bitcoin open interest growing 4.0% in seven days.

The Cooldown

The decrease in funding rates and the rebuilding leverage suggest that the market is entering a period of cooldown. This is characterized by a decrease in the number of long positions being held, and an increase in the number of short positions being held. This cooldown period is similar to what occurred after the 10-10 crash, but it is not enough to guarantee that a repeat of the crash will not occur.

The Floor

The current market conditions suggest that the floor for Bitcoin is around $82,300. This is supported by the fact that the price of Bitcoin has been trading near this level for several days, and that the support at $82,300 is strong. A break below $82,300 could lead to a cascade of selling, similar to what occurred during the 10-10 crash.

The Gauge

The gauge for the risk of a repeat of the 10-10 crash is the amount of liquidation that occurs during a market downturn. In the case of the current market downturn, $487.02 million in longs were liquidated in the 24 hours leading up to Wednesday, which is a relatively small amount compared to the amount of liquidation that occurred during the 10-10 crash. This suggests that the risk of a repeat of the crash is low.

The Floor

The floor for Bitcoin is currently around $82,300. This is supported by the fact that the price of Bitcoin has been trading near this level for several days, and that the support at $82,300 is strong. A break below $82,300 could lead to a cascade of selling, similar to what occurred during the 10-10 crash.

The Tripwire

The tripwire for the risk of a repeat of the 10-10 crash is the amount of funding that is above 8% during a market downturn. In the case of the current market downturn, the funding rate on Deribit is currently below 8%, which suggests that the risk of a repeat of the crash is low.

The Analyst's View

The next Fed meeting on October 27 and 28 is the clearest trigger ahead for a potential rate hike. If funding stays below 8% through that test, a 10-10-style cascade looks unlikely. However, if funding rises above 8%, it could lead to a cascade of selling, similar to what occurred during the 10-10 crash.