Cardano (ADA) increased its market value by an impressive 816 percent in 2021, moving its market value to $ 61 billion. To compare the value of this third-generation smart contract platform, Ether (ETH), the leader of smart contract platforms, had the same market cap just six months ago.
With the price increase of ADA, the open positions of the futures market also exceeded $ 1 billion. This situation offers both an opportunity for price and a threat. Careful investors are wondering if a possible $ 200 million liquidation is visible on the horizon and will result in a 23 percent crash, similar to what happened on April 17.
DeFi still looking for alternatives
There is no doubt that decentralized finance (DeFi) is behind the rallies of smart contract-driven cryptocurrencies. The average transaction fee on the Ethereum network exceeded $ 35, which also prompted investors to look for alternatives.
Cardano uses a proof-of-stake mechanism and will soon add support for smart contracts and token creation on the blockchain. ADA’s current supply, which is 32 billion, will remain limited to 45 billion.
As ADA hit an all-time high of $ 2.20 on May 15, open positions on futures contracts also reached $ 1.01 billion. Considering that ADA’s futures volume rarely exceeds $ 4 billion, this number represents quite an impressive level.
The $ 195 million liquidation experienced in long positions on April 17 was responsible for the 23 percent price drop in four hours. Still, the increase in open positions cannot be cited as the main reason behind liquidations.
Leverage is responsible for negative surprises
Open position is a measure of futures contracts that are open and there is always a balance between buyers (long positions) and sellers (short positions). The most liquidation happens when long positions use excessive leverage. The only way to measure this is the funding rate.
Permanent futures contracts have a funding rate that is updated every eight hours. When buyers use high leverage, this fee increases and their accounts are slowly emptied. When individual buyers flock to the market, this fee can go up to 5.5 percent per week.
The chart above shows how much leverage the buyers used from the crash on April 17th.
An eight-hour funding rate of 0.30 percent corresponds to 6.5 percent per week, significantly increasing the cost of opening a long position.
It will not take long for these unusually high funding rates to trigger stop orders.
On the other hand, the current funding rate is close to zero in most exchanges, indicating a balance between the two parties. Therefore, even if the value of open positions appears to be high, there is no indication that the derivatives market will cause a crash in the ADA price in the current situation.
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