“Long liquidations” dragged down the price of bitcoin this week. Here’s what that means.

on the price of Bitcoin this week. It was hovering about 115 116,000 and then ultimately dropped to 112 111,000. Now it's likeund, you know, 11 12. Uh so what is a long liquidation? Well, anytime a uh anything, a stock or bond or whatever, anyway, anytime something goes up long enough, people start betting that it's just going to keep going up. And when people start betting it's just going to keep going up, one way they do that is with borrowed money, which is called leverage. In finance, typically if somebody's talking about leverage, it means somehow they are borrowing money because that's how you get leverage is you use money that's not yours to bet on the price going up or down. So, uh, a long position means you're holding something for the long term, which means you are planning for it to go up. A short position means you are betting that the price is going to go down. And I don't know where who invented the terms longs and shorts, but it's not very intuitive. But anyway, um so uh you can get long liquidations and short liquidations and both of them can have a cascading effect which is where the actions of one person trigger the actions of another person which trigger the actions of another person. So uh let me paint a picture of what that looks like. Although in practice this happens with tens of thousands, hundreds of thousands, millions of people. But I'm going to paint a very simplified picture so you can understand how it happens. So the price bump bumps around, you know, in the 112,000 to 116,000, you know, price long enough that someone gets the bright idea that they don't think it's ever going to drop more than 5%. And so they do 20 to1 leverage and meaning they're they're putting up $5,000 of capital, borrowing $95,000 of capital and buying $100,000 of Bitcoin. Uh and the problem of course when you're doing that is if you're using leverage and the price starts to drop, you get a margin call. And a margin call means, hey, your collateral is not worth 5% of your 20 to1 bet anymore. You got to post more Bitcoin. And if you don't, you get liquidated. And what happens when you get liquidated is whoever provided the collateral to basically whoever loaned you the money so that you could bet uh with leverage uh has control of that Bitcoin that you used as collateral and they can liquidate it which means they sell it into the marketplace, pocket the money and say thank you for your business, you lost. Uh and that's what happens. That's what you know getting liquidated means. Now you don't have to worry about that because you're not using leverage. If you're buying Bitcoin on River, for example, there's no way to buy it with leverage. And even on Coinbase, you have to get into the derivatives and futures and options and all that sort of stuff. Uh unless you're like borrowing against your Bitcoin, which I do not recommend. Um so anyway, uh the the net um you know effect of all of that is somebody borrows on 20 to1 leverage, then somebody comes along and says, you know what, the price of Bitcoin is trending up. I'll borrow at 30 to1 leverage. and somebody borrows at 40 to1 leverage, somebody borrows at 100 to1 leverage and some idiot comes along and tries to borrow at 500 to one leverage which of course means if the price goes down 2%. Then they get liquidated. Um so then what happens is the price for whatever reason because it goes up and down starts to dip and Mr. I mean I'm not even sure if you can get 500 to1 leverage but let's hypothetically say you can. So the price starts to dip by 02% and Mr. 500 to1 leverage gets liquidated which means his his Bitcoin that he posted as collateral to borrow the extra Bitcoin to get a long leverage long position gets liquidated and sold into the market which causes the 2% price drop to turn into a.5% price drop. Um so at a 5% price drop the next guy gets liquid liquidated who is using 200 to one leverage. Well, then his his Bitcoin gets dumped on the market, which causes the price to correct one full percentage point. Well, if it corrects one full percentage point, then whoever was 100 to one leverage, they get liquidated, which causes the price then, you know, because that Bitcoin gets dumped onto the market, it price causes the price to correct by 2%. Well, now at 2% price correction, everybody who's 50 to one leveraged is now getting margin called, meaning their Bitcoin is getting dumped on the market. And as their Bitcoin gets dumped on the market, you know, it the price cracks by 3%. Well, as soon as the price cracks 3%, everybody who's at 33 to1 leverage gets liquidated also. So all these idiots get wiped out. And so uh it's called typically it's sort of a domino effect, but it's called cascading. People usually refer to it as a, you know, a cascade, a cascade of uh short uh or long liquidations. And that means the price started to drop. Somebody got liquidated. It dropped more. Somebody else got liquidated. It dropped even more. Yet another person got liquidated. And boom, boom, boom, boom, boom. A bunch of people got liquidated. That's why in a very short period of time, you can go from 115 or 116,000. Suddenly down to 112. Like boom. It happened really quick. And the answer is because some leverage had built up in the system. There were too many idiots uh betting with other people's borrowed money with higher and higher and higher degrees of borrowing. And eventually something tripped the most leveraged guy which then tripped the next most leveraged guy and then the next most leveraged guy and then the next most leveraged guy and then the next most leveraged guy. Uh and typically these people are all guys, you know, it always seems to be guys that are getting liquidated. Um I don't know, women just don't seem to do stupid stuff like that nearly as much. Uh but anyway, so a bunch of guys got liquidated and it was like $1.7 billion of leverage longsided. I that was one number I saw. It was above a billion dollars, but I saw $1.7 billion. That means $1.7 billion of people who had bet lost all their money. They lost all their money because they all got liquidated. Um, so poof, $1.7 billion disappears and whoever left uh lent them the money got to keep the interest and they liquidated the uh collateral and so they didn't lose any money. So the people who loaned them that money did not lose anything uh because they got to keep the collateral of the people who got liquidated. But all that Bitcoin $1.7 billion got dumped, you know, really really quick. Um so this is normal. This has been happening since the beginning of Bitcoin uh in every market. Stocks, bonds, you know, real estate, everybody can use liquid liquid uh use leverage for everything. uh when you're doing it for stocks or something that trades real time every day, uh it's just more dangerous because you can get margin called on tiny little price changes. Uh the same would be true of your house. If if a real estate appraiser came out to your house literally every single day to uh you know appraise your house, the same thing would happen. But it doesn't happen to your house because the whole world has just agreed that we don't appraise houses every day. Uh but otherwise, if we did, uh the same thing would happen. you know, a forest fire would start and suddenly people would be getting liquidated on their houses because the risk uh the you know of their house being less valuable goes up. But you don't have to worry about that with car loans or house loans because they are not marked to market. If you don't have a mark tomarket asset, then you don't have to worry about it. And one second. So cars and houses and things like that are not marked to market, which means they only get appraised once before you get the loan. they don't get appraised, you know, every second of every day. Well, if you're, you know, doing commodities or stocks or digital assets like Bitcoin, those are marktomarket, meaning the price is adjusting every fraction of a second. And if you're, if the price gets low enough that you don't have enough collateral to support your loan, then you get liquid. So hopeful in understanding why how it works, why people get liquidated, uh all of that and why the price can suddenly drop from 115 to 112. Now does it matter in the long term? No. This happens all the time. It's been happening for you know hundreds of years in markets. It's been happening for 16 years since the birth of Bitcoin. And once that leverage gets wa washed out, it just takes a little while for the natural organic demand to absorb that $1.7 billion of Bitcoin and then, you know, off to the races. Now, that doesn't mean we can't go farther down before we go up. Nobody knows. Uh what matters is the long term. And in the long term, Bitcoin always eventually goes up. But in the interim, you know, it's it can go up and down on its way up. So, uh anyway, all is fine in the world of Bitcoin. I've been super busy the last week. Uh it always seems like when Bitcoin's like the price is doing nothing, I'm like sitting around wishing something would happen so I can do a video about it. And then as soon as I get too busy to do a video, like the last four or five days, as soon as I get too busy to do a video, suddenly the price drops and I'm like, well, dang it, now I don't have time to even go do a video about it. So the price dropped in like Monday and here I am on Thursday doing a video about it. uh because I just don't have time and often my time availability does not line up exactly with exciting things happening in the world of Bitcoin that uh someone wants me to talk about. Uh but anyway, that's what happened earlier this week. Uh cascade of long liquidations. It doesn't apply to you. It doesn't affect you. You don't have to worry about it. It's just a buying opportunity to buy more Bitcoin and you're good. So, let me know if you have any questions. I'm always here to serve. You can always text me at 601-207-0813. That number again, 601-2070813. Um, or you know, call me, text me, uh, message me on Facebook. I'm always here to help. Thanks everyone.