Bitcoin’s recent stability may be deceptive, with the crypto market underestimating the risk of a major liquidation event, warns Tara McAulay, CEO of Pharos Fund and former co-founder of Alameda Research.
Hidden Risks in Bitcoin’s Low Volatility
Despite Bitcoin’s relatively low volatility in recent months, leverage in the market is quietly increasing, which could lead to severe consequences. McAulay, speaking on the Crypto Options Unplugged podcast with David Brickell, Head of International Distribution at FRNT, raised concerns that traders may be overlooking potential liquidation risks.
“We’ve started to become increasingly concerned over the last couple of weeks that the market might be underweighting the risk of a large liquidation event occurring in the next three months, or certainly over the course of 2025,” McAulay stated.
She drew parallels to March 2020, when Bitcoin futures collapsed by 85% in a single day, wiping out nearly $40 billion from its market capitalization. A similar event today could have even greater ramifications given Bitcoin’s expanded market presence and institutional involvement.
The Growing Leverage Threat
McAulay highlighted that traders are heavily leveraged, often with 6x or 7x positions, based on the assumption that volatility will remain low. However, if Bitcoin were to experience even a 20% price drop, it could trigger a cascading wave of liquidations.
“That maybe makes sense if you think volatility is likely to remain low, but would be quite dangerous and set off a very, very significant cascade of liquidations if there’s a move of only 20% or greater,” she warned.
One key difference from past market conditions is that leverage has shifted from off-exchange lending to on-exchange platforms, where margin calls happen instantly. This structural change increases the likelihood of violent price swings and rapid liquidations.
Is Bitcoin Already in a Bear Market?
McAulay suggested that Bitcoin could already be in the early stages of a bear market, but many investors have yet to recognize it. She noted that historically, it takes about three months for the market to acknowledge a true downtrend.
“There’s kind of this period of decline before you know you’re already in a bear market, where prices have dropped off the high, and then they drop off a little bit more. And everyone keeps saying, ‘Oh, it’s coming back,’” she explained.
Several indicators point toward weakness:
- Trading volumes have dropped by 40% since December
- Retail investor activity remains low
- Bitcoin ETFs are attracting institutional inflows, but existing holders are selling into strength
According to McAulay, a disruption in ETF inflows or any event that shakes investor confidence could lead to a sharp market correction.
“If we get a drop in those inflows, if they pause, if there’s anything that spooks people, and you combine that with the selling activity we’re already seeing, you could get a big crash,” she warned.
Current Bitcoin Price Action
As of the latest data, Bitcoin is trading at $96,289.79, down 0.7%. While the price remains near its recent highs, traders and investors should be cautious of the increasing leverage and potential for volatility.
Final Thoughts
While Bitcoin’s long-term trajectory remains a topic of debate, McAulay’s warning serves as a reminder that the crypto market is still prone to extreme volatility. Traders relying on high leverage may be at significant risk if a sudden downturn occurs.
For the latest updates on Bitcoin trends, expert insights, and market analysis, stay tuned to MoneyOye—your go-to source for crypto news and investment strategies.
