Bitcoin saw a significant drop in the early hours of Monday right after it looked ready for a convincing move above $ 50,000.
The top cryptocurrency fell from about $ 49,000 to $ 45,926 in the early hours of Asia, according to CoinDesk 20 data, and was most recently seen changing hands around $ 47,790;
The decline has surprised many investors, as an all-time milestone looked at the cards amid the optimism generated by the recent wave of corporate adoption.
So what happened? Here are three reasons that could explain the sudden price drop.
“Bitcoin and other cryptocurrencies generally seemed overheated, and the Asian session drop was likely a ‘fund reset’ necessary for a sustained movement of over $ 50,000, ” said Matthew Dibb, COO and co-founder of Stack Funds.
Indeed, the cost of holding long positions in the continuous futures market, also known as bitcoin’s funding rate, rose to a 12-month high of 0.109% on Sunday, indicating excessive bullish leverage or overheating in the market.
The average funding rate started to rise at the end of January and rose to a month high after Tesla announced its bitcoin investments last Monday. This suggests that the recent rally below $ 40,000 was mainly due to leverage in derivatives. Therefore, there was always a risk of zeroing funds.
According to the Coinalyze data source, the price drop has liquidated $ 300 million long Bitcoin positions so far today – roughly 30% of the total long liquidations of $ 1.33 billion observed in the crypto market.
Many alternative cryptocurrencies such as XRP, XLM, LINK, ADA and some decentralized finance-linked tokens experienced double-digit price drops during the Asian session, overshadowing bitcoin’s 6% drop. A wider sale added to downside pressures around Bitcoin, according to Dibb.
By tweet The altcoin rally became “exuberant” last week, meaning market analyst Josh Rager said that a price drop was delayed.
2. Institutional demand weakened
The Coinbase premium indicator of analytics firm CryptoQuant turned negative on Sunday, a sign of weak demand from major investors.
The indicator measures the difference between Coinbase Pro’s BTC / USD pair and Binance’s BTC / USDT pair, which includes the USD-linked stablecoin thread. Since Coinbase Pro is considered synonymous with high net worth individuals and institutional investors, the indicator is widely followed by traders. A positive spread means strong institutional entries and vice versa.
CryptoQuant CEO Ki-Young Ju told CoinDesk, “During the early European hours of the market, the premium dropped to almost $ 80 and remained largely neutral when the price fluctuated between $ 48,000 and $ 49,000.” “Vulnerability entries pointed to the scope of correction.”
Bitcoin’s rally, close to $ 10,000 since early October, was largely driven by increased demand from high-net-worth individuals and institutions. The cryptocurrency has consistently traded with a Coinbase premium of around $ 100 throughout the four-month bull market, with several examples of negative premium paving the way for a price retreat.
Market analyst Joseph Young quoted The Coinbase premium and sluggish Grayscale entries are negative as the price drop developments on Sunday, while the bulls point to $ 48,000 as the level to beat.
According to the Glassnode data source, the seven-day average of Grayscale entries peaked in mid-January and has since then headed south (excluding the Friday increase). While retail investors trade in the spot market, many institutional investors are exposed to bitcoin through the regulated Grayscale Bitcoin Trust (GBTC).
New York-based Grayscale is owned by Digital Currency Group, the parent company of CoinDesk.
The recent rise from $ 30,000 to $ 49,000 lacked volume support on major exchanges like Coinbase.
The 10-day moving average of the daily volume has been falling since the beginning of February. A low-volume price increase is often short-lived and prone to sudden retracements similar to those seen earlier today.
Broader bias continues to rise
Bitcoin’s most recent price drop is typical of pullbacks seen in previous bull markets, and the path of least resistance remains high.
“We’re probably getting into a short and minor correction right now (I think), but we’re still in the middle of a violent bull run that will soon become more violent,” said Ari Paul, CIO of BlockTower Capital. tweeted.
According to analysts, more institutions could soon imitate Tesla’s move to convert cash assets to bitcoin, which could lead to a convincing move over $ 50,000.
At press time, the continuous funding rate normalized to 0.05%, and the Coinbase premium increased to $ 50. Bitcoin has taken some re-stop in the past few hours to trade well above $ 47,000.
Also read: Bitcoin Sets New All-Time High Value of $ 49.7K