5. Snowball effect in crypto - The connection between spot trading and perpetual trading
This piece is written by @hasaki from Phezzan Discord server
1) What does the snowball effect mean?
The snowball effect is when something happens, it will lead to a consequence. Then, this consequence continues to lead to other things happening and make the consequence becomes worse. After that, this loop continues until everything is super super super bad and cannot happen anymore. Bigger and bigger like a rolling snowball
2) Snowball in crypto
Do you guys know what happened to the crypto market on 18/4/2021 and 4/12/2021? There was a crash, which made the BTC price dump a lot. Everyone was super terrified. Actually, if you research the market more specifically, you can easily find the same point in two crashes. Around 1-2 days before the crashes, long orders were extremely outweighed short orders ( 95% long - 5% short on the whole market ). Imbalanced. It was so hyped at that time, everyone thought that the BTC price will go to the moon, to the $100000. Everyone made a long order. The market makers knew this, so they began to sell some of their BTC, and the worst thing began. When the MM sold, the BTC price went down a little bit. Few orders are liquidated. The collateral assets from these orders would be sold on the spot market. Due to the hype, the collateral is so much that it made the BTC price go down even more. And the loop began. More orders were liquidated, more collateral assets were sold, and the price went down. And the result was that BTC dump more than 20%
3) When will the snowball happen?
Now, you have understood this concept. Next is when. Snowball happens when the imbalances appear between the long and short order, especially on the bull run. This is unhealthy and will make the market crash soon.
4) Tips to survive the snowball effect
- You should follow the long short ratio ( This figure will be added to the Phezzan interface soon). If you see a super imbalance between the ratio, be careful before deciding to make an order.
- Don't FOMO. The crashes happened when everyone thought that the BTC price will reach 100000 soon. Don't listen to the majority. Your money, your responsibility.