Here's What Drove Today's Volatility in Bitcoin

The gold standard of cryptocurrencies, Bitcoin (CRYPTO: BTC) is one top token that saw a tremendous amount of volatility this morning. As of 6:30 a.m. ET Friday, Bitcoin declined 6.8% over the past 24 hours. Since then, some of these losses have been made back, but investors are still down 3.8% since yesterday morning, at the time of writing.

The reality for investors, at least of late, has been that Bitcoin's price movements have mirrored those of the broader market, albeit with higher volatility. We've seen this situation play out for some time. But the fact is, I've noticed this higher-volatility correlation more of late, which may be concerning to some investors and lead to the recent outsized downside in Bitcoin relative to other risk assets.

Of course, some of today's moves have to do with some negative headlines around the regional banking sector and concerns around loan quality. But let's take a more specific look at Bitcoin, and see what fundamental factors are driving these moves, and importantly, whether the world's largest cryptocurrency is worth investing in right now.

Image source: Getty Images.

Liquidations are the key story

In terms of fundamentals, there are some key metrics investors pay attention to when it comes to Bitcoin. There are transaction volumes, which are critical to understanding user adoption on the Bitcoin network. Then there's total value locked (TVL) and other activity tied to new applications being launched on Bitcoin's network.

But perhaps the most critical underlying fundamental metric that drives day-to-day moves in Bitcoin are liquidations. Liquidations refer to leveraged derivative positions that are effectively wiped out due to a move that exceeds a specific volatility band over a short time frame. Indeed, given the volatility we've seen in Bitcoin over the past day, some outsized liquidations activity can be expected.

Over the past 24 hours, $3.33 million worth of Bitcoin has been liquidated on the short end (almost the entirety of the $3.36 million in total liquidations over this time frame). That's a very large sum, even for Bitcoin, and is enough to move the price in an outsized fashion over the short term.

Is Bitcoin a buy?

Now, I wouldn't be surprised to see this rally in Bitcoin continue from here. For now, liquidations data are what I'd encourage investors to look closely at to determine these short-term swings. Over the long term, I'm still bullish on Bitcoin.

Chris MacDonald has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.