Introduction

1.1 Background and Purpose

Since its birth in 2009, Bitcoin, with its characteristics of decentralization and limited total amount, has rapidly risen in the global financial market, becoming a highly anticipated cryptocurrency. From circulating only among the early technical geek community to attracting a large number of investors and financial institutions, the Bitcoin market continues to expand, and trading activity remains active. Its price trend is like a roller coaster, attracting the attention of global investors and sparking widespread discussions in the financial market.

In the Bitcoin market, liquidation activity is a key phenomenon that profoundly affects market price fluctuations, investor returns and risks, and the overall market stability. Liquidation typically occurs when investors’ leveraged trading positions fail to meet maintenance margin requirements, and the trading platform forces liquidation to avoid further investor losses while protecting its own interests. This forced liquidation behavior can lead to a significant impact on market prices as a large amount of Bitcoin is sold or bought in a short period of time.

Bitcoin liquidation heat map, as a tool for intuitively displaying liquidation data, plays a crucial role in understanding the dynamics of the Bitcoin market. It visually presents key information such as the quantity and amount of liquidation in different price ranges and time periods. Through the liquidation heat map, we can intuitively see which price levels the liquidation activities are most concentrated and how the intensity of liquidation activities changes over different time periods. This helps investors and market analysts gain insight into potential risk points and price fluctuation trends in the market, providing strong support for investment decisions and market research.

Bitcoin Clearing Heat Map Basics

2.1 Bitcoin clearing concept

In the Bitcoin market, liquidation mainly occurs in the context of leveraged trading. Leveraged trading allows investors to control a larger value of Bitcoin positions with less of their own capital, by borrowing funds to amplify investment returns. However, while this trading method brings potential high returns, it also comes with significant risks. When the price of Bitcoin fluctuates in a direction unfavorable to investors’ positions, the value of investors’ margin accounts will decrease. Once the balance of the margin account falls below the maintenance margin level specified by the trading platform, the trading platform will trigger the liquidation mechanism.

For example, suppose an investor buys Bitcoin with 10 times leverage, with an initial margin of 10% of the position value. If the price of Bitcoin falls, causing the value of the investor’s margin account to fall below the maintenance margin level (such as 5% of the position value), the trading platform will forcibly close the investor’s position. This means that the platform will sell the investor’s Bitcoin position at market price to repay the borrowed funds and interest, with any remaining funds (if any) returned to the investor. This process of forced liquidation is called Bitcoin settlement.

The triggering factors for liquidation mainly include price fluctuations and insufficient margin. The Bitcoin market experiences intense price fluctuations, influenced by various factors such as global macroeconomic conditions, changes in policies and regulations, and market sentiment. When prices fluctuate significantly in a short period, investors’ leveraged positions are easily impacted. If investors misjudge the market trend when establishing leveraged positions and fail to adjust margin or stop loss in time, they will be forcibly liquidated once the price reaches the liquidation line. In addition, insufficient margin is also a direct cause of liquidation. When investors engage in leveraged trading, they need to deposit a certain proportion of margin based on the leverage multiple and position size. If, during the trading process, the value of the margin account decreases due to price fluctuations, and investors fail to replenish the margin in time, liquidation will occur when the margin falls below the maintenance level.

2.2 Composition and Principle of Liquidation Heat Map

The Bitcoin Liquidation Heatmap is a visualization tool that intuitively displays the distribution of Bitcoin liquidation activities across different price ranges and time dimensions. The horizontal axis of the heatmap represents the price range of Bitcoin, dividing the Bitcoin price into certain price intervals, with each price range corresponding to a position on the horizontal axis. The vertical axis represents time, and the time span can be set according to the demand, such as hours, days, weeks, etc., to reflect the liquidation situation within different time periods.

In the heat map, color is a key element representing liquidation intensity. Typically, the depth of color is used to indicate the amount or value of the liquidation. The darker the color, the greater the amount or value of the liquidation that occurred at that price range and time, indicating higher liquidation intensity; the lighter the color, the lower the liquidation intensity. Through this color-coded method, users can instantly see which price ranges and time periods have the most concentrated liquidation activity, and which areas are relatively calm.

Its principle is based on the statistics and analysis of the clearing data. When a clearing occurs on the trading platform, relevant information such as clearing price, clearing time, and clearing quantity will be recorded. These data are classified and counted according to price ranges and time, calculating the total clearing volume at each price range and time point. Then, according to pre-set color mapping rules, the total clearing volume is converted into corresponding colors to be displayed on a heat map. In this way, a large amount of clearing data can be transformed into intuitive graphics, helping users quickly understand the distribution characteristics and intensity changes of market clearing, thus providing strong support for market analysis and investment decisions.

3. Interpretation of Bitcoin Liquidation Heat Map

3.1 Key Metrics Interpretation

3.1.1 Liquidation Intensity

In the Bitcoin liquidation heat map, the depth of color is an intuitive indicator reflecting the strength of liquidation. It is usually represented by a gradual change in color, such as transitioning from light colors (such as yellow) to dark colors (such as red or purple). The lighter the color, the lower the liquidation intensity of the price range and time point, indicating that the amount or value of liquidation that occurred here is relatively small; while the darker the color, the higher the liquidation intensity, indicating that a large amount of Bitcoin positions were liquidated here.

High-intensity liquidation zones have a significant impact on price trends. When the price of Bitcoin approaches or enters a high-intensity liquidation zone, the market’s supply-demand balance will be severely impacted. If a large number of long positions are liquidated in a certain price range, it means that the supply of Bitcoin in the market will increase significantly in the short term. A large amount of selling pressure will cause the selling force in the market to far exceed the buying force, leading to a rapid decline in the price of Bitcoin. Conversely, if short positions are liquidated in a certain price range, shorts need to buy Bitcoin to close positions, which will increase the market demand for Bitcoin in the short term and drive up prices.

3.1.2 Clearing Peak

The liquidation peak refers to the point where the liquidation intensity reaches its maximum on the liquidation heat map. The occurrence of the liquidation peak is usually the result of the combined effect of multiple factors. A sudden change in market sentiment is an important factor. When the market is in a state of excessive optimism or excessive pessimism, investors tend to over-leverage, leading to the accumulation of market risks. Once unexpected news or events occur in the market, such as significant fluctuations in macroeconomic data, major adjustments in regulatory policies, etc., it will trigger a sharp change in investor sentiment, leading to a large number of investors hastily closing positions, thereby forming a liquidation peak. Major market events, such as the approval or rejection of Bitcoin spot ETFs, large financial institutions increasing or decreasing their holdings of Bitcoin, etc., will also have a significant impact on market expectations, triggering a large amount of liquidation behavior and forming a liquidation peak.

By analyzing the liquidation peak, investors can better understand the turning points of the market trend. When the liquidation peak appears, it often indicates that the market trend may be about to change. The appearance of a liquidation peak in an uptrend may indicate the exhaustion of upward momentum, and the market is about to enter a phase of adjustment or decline; while the appearance of a liquidation peak in a downtrend may suggest that the market is releasing risks, and the bottom may be approaching.

3.1.3 Price Range and Clearing Relationship

The liquidation distribution in different price ranges shows distinct characteristics. In the historical trend of Bitcoin prices, certain price ranges tend to be the focal points of liquidation activities. At integer price levels of Bitcoin, such as BTC price at 100,000 USDT, a large number of investor orders are usually concentrated, making these price ranges important psychological levels in the market. When the price approaches these integer levels, investors’ trading behavior becomes more cautious. Once the price breaks through or falls below these levels, it often triggers a large number of stop-loss orders, leading to an increase in liquidation activities.

Near some important technical analysis support and resistance levels, the distribution of liquidation is also relatively concentrated. According to technical analysis theory, the support level refers to encountering strong buying support when the price falls to a certain extent, making it difficult for the price to continue to decline; while the resistance level refers to encountering strong selling pressure when the price rises to a certain extent, making it difficult for the price to continue to rise. When the price of Bitcoin approaches these support or resistance levels, if market forces cannot break through or hold these positions, it will trigger a large number of investors’ liquidation behavior, leading to liquidation activities.

These key price levels are closely related to liquidation activities. When the price of Bitcoin approaches a resistance level and there are many long positions in the market but the price fails to break through the resistance level effectively, as the price falls, the margin of long positions will gradually decrease. When the margin falls below the maintenance level, the liquidation mechanism will be triggered, forcing a large number of long positions to be liquidated, further intensifying the price decline. Conversely, when the price approaches a support level and there are many short positions, if the price falls below the support level, the profit of the short positions will prompt short covering for profit, and also trigger some long positions to stop loss, leading to an increase in liquidation activities and the price may further decline. For example,

3.2 The Relationship with Market Trends

3.2.1 Liquidation Heat Map Performance in Bull Market

During the bull market phase in the Bitcoin market, the price showed a continuous upward trend. Taking the bull market from 2020 to 2021 as an example, the price of Bitcoin started to rise from a low point of about $5,000 in March 2020, soaring to nearly $70,000, the historical high point, in November 2021. In this bull market process, the liquidation heat map showed a unique performance.

As the price continues to rise, the liquidation intensity is relatively low in the early stage. This is because in the early stage of a bull market, market sentiment gradually shifts from pessimism to optimism, investors begin to gradually increase their long positions, and the leverage level in the market is relatively reasonable. As the price continues to rise, investors’ optimism continues to soar, and more and more investors join the long side, and the leverage ratio gradually increases. When the price rises to a certain stage, such as approaching the previous important resistance level or psychological barrier, the liquidation intensity begins to gradually increase. When the price of Bitcoin rises to around $50,000, because this price area has important resistance significance in the previous market trend, many investors set stop-loss orders here. When the price approaches this area, the margin of some long positions is affected by price fluctuations, leading to an increase in liquidation activity, and the color of this price range and corresponding time point on the liquidation heatmap gradually deepens.

The change in the intensity of liquidation has an important predictive effect on the continuation or reversal of the bull market. If, during the price increase process, although the liquidation intensity has increased, it still remains relatively controllable overall, and the buying power of the market remains strong enough to absorb the selling pressure caused by liquidation, then the bull market is expected to continue. In most of the time during the bull market in 2020-2021, although there was an increase in the intensity of liquidation in some key price ranges, the overall upward trend of the market was not fundamentally affected, and the price of Bitcoin continued to reach new highs. However, when the intensity of liquidation suddenly and significantly increases at a certain stage, and continues to remain at a high level, while the buying power of the market begins to weaken and is unable to effectively absorb the large amount of selling pressure generated by liquidation, this may indicate that the bull market is about to face a reversal. If a large number of long positions are liquidated when the price is close to historical highs, and the price cannot continue to break through new highs, but instead begins to show a significant pullback, this may be a signal that the bull market is ending, and the market will enter an adjustment or bear market phase.

3.2.2 The Liquidation Heat Map in Bear Market Performance

In the bear market phase of the Bitcoin market, the price shows a continuous downward trend. Taking the bear market of 2017-2018 as an example, the price of Bitcoin started to decline from the historical high point of about $20,000 in December 2017, all the way down to around $3,000 in December 2018. During this long bear market process, the liquidation heat map shows characteristics that are completely different from the bull market.

As the price continues to fall, liquidation activities are becoming more frequent. In the early stages of a bear market, market investors still hold some hope for a price rebound. Some investors choose to hold long positions and even increase leverage to try to buy the bottom. However, as the price keeps dropping, the margin of these long positions is continuously eroded. When the price breaks through some key support levels, a large number of long positions are forcibly liquidated due to insufficient margin. In 2018, when the price of Bitcoin fell below the important support level of $10,000, it triggered a panic selling of many long positions in the market, leading to a sharp increase in liquidations. The color of this price range and corresponding time period on the liquidation heat map became unusually deep, indicating a high-intensity liquidation state.

This liquidation situation plays an important indicative role in deepening or bottoming out the bear market. If during the price decline process, the liquidation activity continues to intensify, and new support levels are constantly broken, this often means that the bearish forces dominate the market, and the bear market will deepen further. In the bear market of 2018, the Bitcoin price repeatedly broke key support levels, each break accompanied by a large amount of liquidation activity, leading to the spread of market panic sentiment, prices continuously hitting new lows, and the bear market continuing and deepening. However, when the liquidation intensity gradually weakens after reaching a peak at a certain stage, and signs of stabilization appear in the price decline process, such as multiple attempts in a price range but failing to continue hitting new lows, this may imply that the market is gradually releasing risks, and the bear market is about to bottom out. When the Bitcoin price fell to around $3,000 in December 2018, although the liquidation intensity was still relatively high, it began to show a downward trend, and the price started to consolidate in that area, laying the foundation for the subsequent market bottom rebound.

3.2.3 Characteristics of the settlement heat map during the consolidation period

During the consolidation period in the Bitcoin market, price fluctuations are relatively small, and the market is in a state of relative balance between long and short forces. During the consolidation period, the liquidation intensity is usually low, and the distribution in different price ranges is relatively uniform. This is because during the consolidation phase, market participants have a vague expectation of future price trends, investors’ trading behavior is relatively cautious, and leverage usage is also restrained. The strength of long and short positions in the market is relatively balanced, with neither side able to gain a significant advantage, so there will be no large-scale liquidation activities.

In 2023, [specific time period], Bitcoin’s price remained in the range of 30,000 to 35,000 US dollars for several months. During this period, the liquidation heat map showed that the liquidation intensity in various price ranges remained at a relatively low level, with relatively light colors, and there was no obvious concentration of liquidation. This liquidation intensity and distribution characteristics play an important role in judging the market breakthrough direction. If during the consolidation period, the liquidation activity in a certain direction gradually increases, such as an increase in long liquidation, it may indicate that the bullish strength in the market is beginning to weaken, the bearish strength is gradually strengthening, and there is a possibility of a downward breakthrough in the market; conversely, if short liquidations increase, it may suggest a trend of upward breakthrough in the market. When in the later stage of consolidation, an increasing amount of short liquidation activity is observed near 30,000 US dollars, and the price receives support in this area multiple times, this may indicate that bullish strength is accumulating in the market, and there is a possibility of an upward breakthrough in the consolidation range. Investors can use these changes in the liquidation heat map, combined with other market indicators such as trading volume, open interest, etc., to comprehensively judge the market’s breakthrough direction, and formulate corresponding investment strategies.

Four, Factors Affecting the Bitcoin Clearing Heat Map

4.1 Macroeconomic Factors

The changes in the macroeconomic situation have a profound impact on the price of Bitcoin, which in turn affects the Bitcoin liquidation heatmap. During periods of strong global economic growth and ample market confidence, investors have a higher risk appetite and tend to allocate funds to high-risk, high-return assets. As an emerging digital asset, Bitcoin is often favored by investors, with increased demand driving prices up. When economic growth slows down and faces the risk of recession, investors’ risk aversion significantly increases, and they are more inclined to hold traditional safe-haven assets such as gold, the US dollar, etc. The demand for Bitcoin will decrease accordingly, and prices may fall. During the 2008 global financial crisis, the price of Bitcoin also experienced dramatic fluctuations. As the crisis spread, market panic intensified, investors sold off risk assets, and the price of Bitcoin plummeted in the short term. A large number of leveraged positions were liquidated, leading to a high-intensity liquidation area on the liquidation heatmap.

4.2 Industry Policy Factors

The regulatory policies of governments on Bitcoin play an important guiding role in the behavior and liquidation of market participants. Changes in regulatory policies directly affect the confidence and expectations of market participants, thereby altering their investment decisions. Some countries adopt a positive regulatory attitude towards cryptocurrencies, clarify their legal status, and formulate corresponding regulatory rules, which enhances the confidence of market participants and attracts more investors to enter the market. In this case, the trading activity in the market increases, the price of Bitcoin may rise, and the liquidation activities remain relatively stable. Conversely, some countries implement strict regulatory measures on cryptocurrencies, such as banning trading, restricting the participation of financial institutions, etc., which can lead to panic among market participants, prompting a sell-off of Bitcoin, causing a decline in the Bitcoin price, and a surge in liquidation activities. For example, in 2017, the Chinese government completely banned the operation of trading platforms for Bitcoin and other virtual currencies. After this policy was implemented, the price of Bitcoin plummeted sharply in the short term, triggering panic selling by a large number of investors, and a significant increase in liquidation activities in the market. The liquidation intensity on the liquidation heat map sharply increased during that period.

4.3 Market Participant Behavior Factors

Investor sentiment is one of the important factors affecting the liquidation heat map of Bitcoin. The Bitcoin market is a highly emotional market, and investors’ emotional fluctuations will directly affect their trading behavior. When the market is in a bull market and prices continue to rise, investors often generate optimistic emotions, excessively confident that prices will continue to rise, thereby increasing leverage positions and increasing investment intensity. This optimistic sentiment leads to a continuous increase in long positions in the market. Once the market experiences a correction and prices fall, these long positions are easily threatened with liquidation. When market sentiment turns bearish, investors will sell Bitcoin one after another, causing prices to fall further, more leveraged positions are liquidated, and the liquidation heat map will show an increase in liquidation intensity. In the later stages of the 2021 Bitcoin bull market, market sentiment was extremely optimistic, and many investors blindly leveraged to buy Bitcoin. When prices started to fall, a large number of long positions were liquidated, resulting in a high-intensity liquidation zone on the liquidation heat map.

Investors’ trading strategies also affect the liquidation heat map. Different investors adopt different trading strategies, such as trend following, arbitrage trading, intraday trading, etc. The differences in these trading strategies can lead investors to trade at different price ranges and time points, thus affecting the distribution of liquidation activities. Investors using trend following strategies will buy when the Bitcoin price rises and sell when it falls. When prices fluctuate significantly, their positions may be liquidated. Investors using arbitrage trading strategies will buy and sell based on price differences between different trading platforms. When the price differences disappear or change direction, their arbitrage positions may be liquidated. Investors using intraday trading strategies will frequently buy and sell Bitcoin within a day. Their trading decisions rely more on short-term price fluctuations and technical indicators, making their positions vulnerable to liquidation in case of unexpected market volatility.

Changes in fund flows also affect the liquidation heatmap. The fund flows in the Bitcoin market are influenced by various factors such as market expectations, macroeconomic situation, and industry policies. When the market expects the price of Bitcoin to rise, funds will flow into the Bitcoin market in large quantities, driving up the price and increasing leverage positions in the market. Once market expectations change, funds start to flow out of the Bitcoin market, causing prices to fall, and these leverage positions may be liquidated. When the macroeconomic situation is unstable or there are significant changes in industry policies, funds will also be transferred between different assets, leading to inflows or outflows in the Bitcoin market, thereby affecting liquidation activities. If the macroeconomic situation deteriorates, investors may transfer funds from the Bitcoin market to traditional safe-haven asset markets, causing Bitcoin prices to fall, increasing liquidation activities, and corresponding changes will be displayed on the liquidation heatmap.

Application of Bitcoin Liquidation Heat Map

5.1 Application Value to Investors

5.1.1 Risk Assessment

Investors can comprehensively assess investment risks through the Bitcoin liquidation heat map. In the evaluation process, investors first focus on the liquidation intensity in different price ranges on the heat map. When the heat map shows a darker color in a certain price range, it indicates a high liquidation intensity in that price range, meaning that there are a large number of leveraged positions being liquidated near this price level. This may be due to the fact that this price range is an important support or resistance level in the market. Once the price touches it, a large number of stop-loss orders will be triggered, leading to increased liquidation activity. When considering establishing positions in this price range, investors need to carefully assess the risks.

5.1.2 Trading Strategy Formulation

Bitcoin clearing heat map provides important basis for investors to formulate trading strategies. When formulating a buying strategy, investors can refer to the clearing heat map to find suitable buying opportunities and prices. If the clearing heat map shows low clearing intensity in a certain price range and the price is relatively low, this may be a good buying opportunity. Because in the low clearing intensity zone, the selling pressure in the market is small, the price is relatively stable, and the risk of price fluctuations faced by investors after buying is relatively small. When the Bitcoin price has been falling for a period of time, the clearing heat map shows a significant decrease in clearing intensity in the [specific low price range], and there are signs of price stabilization in this range, investors can consider gradually buying Bitcoin in this range to establish long positions.

When formulating a selling strategy, the liquidation heatmap also plays an important role. When the heatmap shows a significant increase in liquidation intensity in a certain price range and the price is relatively high, this may be a selling signal. Because high liquidation intensity indicates that a large number of leveraged positions in the market are being liquidated, selling pressure in the market increases, and the price may face downside risks. When the Bitcoin price rises to [specific high price range], the liquidation heatmap shows a sharp increase in liquidation intensity in that range, which may indicate that the upward momentum in the market is about to wane. Investors may consider gradually selling Bitcoin in this range to lock in profits.

Investors can also use the liquidation heat map to reasonably set stop-loss and take-profit levels. The setting of the stop-loss level can refer to the high-risk price range in the liquidation heat map. If investors hold a long position, when the price approaches the high liquidation intensity area shown in the liquidation heat map, in order to avoid the position being liquidated due to price drop, investors can set the stop-loss level within a certain range below that area. If the liquidation heat map shows a high liquidation intensity near [X] dollars and investors hold a long position, they can set the stop-loss level at around [X - 100] dollars to control the risk. The setting of the take-profit level can be combined with the market trend and the changes in the liquidation heat map. When the market is in an upward trend and the liquidation heat map shows signs of increased liquidation intensity in a certain price range, investors may consider setting the take-profit level near that range to ensure timely profit taking before the market trend reverses.

Conclusion

Bitcoin clearing heat map has important application value. For investors, it is a powerful tool for risk assessment and trading strategy formulation, helping investors identify high-risk areas, set stop-loss and take-profit levels reasonably, and seize investment opportunities. For market analysts, it is an important means for market trend prediction and abnormal fluctuation monitoring. Combined with other market indicators, it can more accurately judge market trends and timely identify market risks.