BTC and ETH Tumble, Wiping Out Over $600M in Leveraged Longs

In the past day, Bitcoin (BTC) and Ethereum (ETH) experienced serious price drops. BTC fell 10+% to $52,500 before recovering slightly, and ETH dropped 20+% before stabilizing. The downturn led to over $700 million in leveraged positions being liquidated. Additionally, Bitcoin's ”Fear and Greed” indicator shows a shift to fear, and concerns about Bitcoin rollups' sustainability have emerged. Despite the volatility and uncertainty in the crypto market at the moment, Morgan Stanley plans to offer Bitcoin ETFs to wealthy clients.

Bitcoin and Ethereum Prices Plunge

Throughout the past day, Bitcoin (BTC) experienced a steep crash to $52,500 in a sudden downturn that saw the crypto lose 10% of its value from $58,350 in less than two hours. However, Bitcoin was able to regain some ground and was trading at $54,219 at press time, according to CoinMarketCap data. This was the first time BTC traded below $53,000 since Feb. 26 after a rally that was driven by the approval of spot Bitcoin exchange-traded funds (ETFs) in the United States.

BTC / TetherUS 1D (Source: TradingView)

Ethereum (ETH) also saw a big drop in price, falling 20+% from $2,695 to as low as $2,118 over the past 24 hours. ETH has recovered slightly to trade hands at $2,325 at press time. 

The sudden downturn in the crypto market resulted in more than $700 million in leveraged positions being liquidated in the last 24 hours. This included $644 million in leveraged longs being wiped out, according to CoinGlass data. Ethereum traders were hit the hardest as over $304 million in ETH longs were liquidated, compared to $248 million in BTC longs.

Liquidation Heatmap (Source: GoinGlass)

The recent market turmoil can be linked to a number of factors, including a sharp sell-off in the Japanese stock market. The Nikkei 225 experienced a 7.1% drop in early trading hours after a decision by Japan's central bank to hike interest rates. This led to the worst day of performance for Japanese bank stocks since 2008.

Additionally, weak jobs data in the United States, slowed growth among leading tech companies in the stock market, and concerns about mass selling from crypto trading firms could all be contributing factors to the recent market volatility. 

The flash crash led to a temporary wipeout of as much as $500 billion in the total crypto market capitalization over the past three days. This makes it the largest 72-hour wipeout in well over a year.

Traders Turn Fearful

Crypto critic Peter Schiff believes that Bitcoin has been in a bear market for years. He recently pointed out that Bitcoin is close to 34% down against gold since hitting its November 2021 high, while gold recently surpassed $2,500 per ounce, reaching a fresh record high. Earlier this week, Schiff also predicted that creditors might pressure MicroStrategy, which is the largest corporate holder of Bitcoin, to sell its holdings.

Additionally, Bitcoin's ”Fear and Greed” indicator that gauges market sentiment shows that traders have become fearful again as it currently stands at 26 out of 100. This comes after a recent impressive sentiment jump last month, when Bitcoin went from fear to greed in less than a week. However, this time, Bitcoin shifted from the highest bullish sentiment in 16 months to fear in just as little time.

Jump Crypto Liquidates Hundreds of Millions in Crypto

It seems there might be good reason for traders to be a bit more cautious about BTC and ETH’s next move. In fact,  blockchain data reveals that Jump Crypto is liquidating hundreds of millions of dollars worth of crypto. 

According to Arkham Intelligence, addresses tagged as belonging to Jump Crypto have seen an inflow of about $300 million since Aug. 3, primarily from exchange wallets. At the same time, the firm's wallets have seen outflows of about $80 million to exchanges like Coinbase, Gate.io, and Binance.

A lot of the moved funds are in the form of ETH. According to X user EmberCN, Jump has been redeeming over $500 million worth of Lido's wstETH into ETH since July 25, after the launch of US-based spot Ethereum ETFs. Jump still holds about $130 million in staked ETH, while almost $200 million worth of unstaked ETH has entered exchanges.

Screenshot of EmberCN’s X post (Source: X)

Jump Crypto's President, Kanav Kariya, left the firm in June after three years. This happened following reports that the U.S. Commodity Futures Trading Commission (CFTC) is investigating the firm's crypto investing activity.

Bitcoin Rollups Face Sustainability Issues

There might be even more challenges ahead for Bitcoin as a Galaxy Research report suggests that most Bitcoin layer-2 scaling networks, particularly ”rollups,” may not be sustainable in the long term despite their popularity for keeping Bitcoin payments cheap, fast, and decentralized. 

Analyst Gabe Parker pointed out the fundamental challenge of data posting costs that Bitcoin rollups face when posting data to the base layer. For rollups to thrive, they have to generate a lot of revenue from transaction fees on their own networks. This requires many users to willingly pay for transactions on the layer-2 networks.

Rollups work by compressing many transactions into a single batch and posting a summary back to the main blockchain. Bitcoin rollups use the blockchain as a “data availability layer,” allowing any Bitcoin node to reconstruct the most recent state of the rollup network. However, Bitcoin blocks have a 4 megabyte (MB) storage capacity limit, and each data posting transaction can consume up to 400 kilobytes (0.4MB) of block space, occupying 10% of a block.

With multiple rollups expected to post data every six to eight blocks, base-layer fees could rise significantly, potentially pricing out smaller transactions. To survive, rollups have to generate fee revenue to determine their priority in the blocks. Galaxy Research estimated that in a low-fee environment, rollups could incur monthly expenses of $460,000 to maintain Bitcoin’s security, while in high-fee environments, costs could soar to $2.3 million.

Alexei Zamayatin, co-founder of ”Build on Bitcoin” (BOB), believes Bitcoin rollups can actually be as cost-effective as Ethereum rollups, but argues against using Bitcoin’s main chain for data availability. Instead, he recommends using Celestia or a merge-mined Bitcoin sidechain, which, while cheaper, sacrifices some of Bitcoin’s decentralization and security.

Zamayatin also responded to the Galaxy report on X, and stated that Bitcoin L2s won’t be more expensive than Ethereum L2s despite people’s concerns.

Morgan Stanley to Offer Bitcoin ETFs to Wealthy Clients

Despite all of this uncertainty, Wall Street giant Morgan Stanley will allow its advisers to offer Bitcoin ETFs to wealthy clients starting Wednesday, according to CNBC. The firm is allowing its over 15,000 financial advisers to sell shares of BlackRock's IBIT and Fidelity's FBTC. However, clients need a net worth of at least $1.5 million to qualify.

The approval of spot Bitcoin ETFs in the U.S. in January sparked hopes that these investment vehicles will attract interest from financial institutions. However, major firms like Morgan Stanley typically undergo extensive compliance and review processes before approving new funds for their clients. Now, the bank decided to offer Bitcoin ETFs in response to client demand.

Morgan Stanley held about $269.9 million of Grayscale’s Bitcoin Trust (GBTC) on Mar 31. This could indicate a potential plan to offer ETFs to clients in the future as well, but nothing is set in stone just yet.