Given the crypto market’s inherent volatility, these past few weeks have been a sobering reminder of that fact. Related Market correction causes $754 million in liquidations Today, institutional and retail investors alike are asking themselves what triggered this dramatic collapse and what’s in store going forward for Bitcoin and the rest of the digital asset ecosystem. BlockchainShock takes a deep dive into the #1 driver of these liquidations to provide you with blockchain-backed insights and strategies for weathering the crypto storm.

Understanding Crypto Liquidations

Crypto liquidations occur during highly leveraged trades. Traders use leverage — or borrowed funds — to amplify their trading positions. If they are unable to maintain the margin requirements, their trades are automatically liquidated. If the asset price goes the opposite way from a trader’s position, the system liquidates — or automatically closes — their positions. This is primarily to ensure that no additional losses are borne by the exchange or lending platform. Several factors can trigger these liquidations, including:

  • Market Downturns: Broad market declines, like the one in December 2024 which sparked over $1.4 billion in liquidations, can quickly lead to cascading liquidations as prices fall rapidly.
  • Specific Crypto Collapses: The collapse of cryptocurrencies such as TerraUSD (UST) and LUNA in May 2022 demonstrated how the failure of a major project can send shockwaves through the entire market.
  • Large Token Sales: Significant sales of tokens by major holders, such as founders selling their tokens at the price peak, triggering an 85% price decline, can create panic and further price drops.
  • Regulatory Actions: Regulatory actions, such as the SEC lawsuit against Binance in June 2023, which led to $320 million in losses, can create uncertainty and trigger sell-offs.
  • Market Selloffs: Sudden market selloffs can trigger mass liquidations as leveraged positions are closed out en masse. For instance, the selloff in August 2023 triggered $1 billion of liquidations.

The Impact of US Tariffs

Recent market volatility has been steeped in geopolitical concerns, especially the unknowns of new US tariffs. According to BlockchainShock, that market suffered another shock after US President Donald Trump outlined his new “reciprocal” tariffs on China and other countries. This change was the single biggest impetus for the market’s retreat. Bitcoins rally has been tested by the unique volatility created thru tariffs. It erased most of its IPO post-election spike and now casts doubt on its viability to ever beat the Street going forward.

Economic Uncertainty

With tariff pressures having decimated the Trump administration’s hoped-for boosts from the “Trump rally” in traditional markets. Since mid November, the S&P 500 and Nasdaq 100 are down more than 10%. Historically, tariffs of the magnitude that Trump is planning can cause widespread inflationary pressures, further exacerbating the economic turmoil. The market dip reflects a mix of tariff deadline fear and broader macroeconomic uncertainty, with Trump's new plans amplifying volatility.

Federal Reserve Policy

Policy decisions from the Federal Reserve and the direction of their monetary policy are key factors in the development of the cryptocurrency market. The effect of higher interest rates on equities, crypto, and commodities like oil during the last few years. In 2022, cryptocurrency prices struggled as interest rates started to rise. Once rates reached their peak, crypto prices bottomed out, beginning an upward trajectory in 2023 and continuing throughout 2024.

Interest Rate Impact

The promise of lower rates was enough to prevent oil and other commodities, and even cryptocurrencies, from crashing into the ground. Then interest rates skyrocketed in 2022 and 2023. After September, the Fed has begun to cut, with future cuts likely extending into 2025, even after a halt in the first half of the year. The Federal Reserve's monetary policy decisions can impact the value of Bitcoin and other cryptocurrencies, as changes in interest rates can influence investor sentiment and asset prices.

Whale Activity

Because of this, large trades from these so-called “whales,” or big cryptocurrency holders, can immediately affect market prices. Whale is a common term for a crypto investor/entity that holds a massive amount of coins. As a result, their buy/sell orders can lead to significant price movement, precipitating liquidations and shaping market sentiment. No one can track whale activity like BlockchainShock, to know when a market-moving event is about to occur.

Navigating Market Volatility: Strategies for Investors

We know that the crypto marketplace is incredibly volatile. To protect their investments, investors need to embrace smart risk management practices. BlockchainShock recommends the following approaches:

  • Risk Assessment: Conduct a thorough risk assessment to identify potential risks and their impact on the investment portfolio.
  • Diversification: Diversify the portfolio by investing in different asset classes, sectors, and geographic regions to minimize exposure to any one particular market or sector.
  • Risk Mitigation: Implement risk mitigation strategies such as stop-loss orders, limit positions, and hedging to reduce potential losses.
  • Regular Portfolio Rebalancing: Regularly review and rebalance the portfolio to ensure that it remains aligned with the investor's risk tolerance and investment objectives.
  • Asset Allocation: Allocate assets according to the investor's risk tolerance and investment horizon to minimize exposure to market volatility.

Knowing when and why market liquidations happen puts the power back in investors’ hands. With proper risk management measures in place, they’ll have a smoother path to enter the exciting and unpredictable crypto world.