In a rather dismal way to end the week, most major cryptocurrencies took a plunge on Friday, with the overall crypto market losing 8% of its market capitalization in short order this morning. As of 12:15 p.m. ET, top tokens Avalanche (AVAX 1.02%), Cardano (ADA -1.71%), and XRP (XRP 1.11%) each saw more substantial losses, plunging 11.3%, 13%, and 10.6%, respectively, over the past 24 hours.
Few explanations exist for this morning’s flash crash, which saw the majority of these losses take place in just minutes during Asian trading hours. However, a surge in long liquidations in the crypto derivatives market has prompted concerns that significantly leveraged positions could be at the crux of this sectorwide decline today.
This move across most major tokens followed broad-based selling in equity markets tied to a massive $2 trillion options expiry today, and what appears to be pervasive concerns about the sustainability of this rally moving forward.
So-called “flash crashes” or parabolic spikes in the crypto sector aren’t uncommon, given the amount of leverage in the system. When forced liquidations occur as a result of derivatives bets getting unwound, the price action of various key tokens can tumble sharply in a short amount of time. Indeed, given the more speculative nature of the crypto market, data on liquidations is key to watch for investors taking shorter-term positions in this sector.
Avalanche, Cardano, XRP, and a host of other tokens moved generally in sync early this morning, signaling that broad-based macro factors continue to reign supreme over all projects. While each of these individual cryptos have their own idiosyncratic catalysts and headwinds, this environment has proven itself to be a token-picker’s nightmare. Right now, many indications are that this environment may not change for some time.
Until correlation between other risk assets comes down, investors in any crypto asset appear beholden to shifts in macro sentiment. Today, sentiment has taken a turn lower, bringing these higher-beta cryptos down to a greater degree than other assets. That said, those banking on a recovery in risk assets may view this sell-off as another buying opportunity. Time will tell which camp is proven right.
Chris MacDonald has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Avalanche. The Motley Fool has a disclosure policy.