Bitcoin’s price (BTC) fell dramatically from $37,800 to $35,000 overnight, liquidating $572 million worth of cryptocurrency futures bets.
There are three key reasons why Bitcoin’s price has fallen significantly in the last 12 hours. The causes for this are the overheated options market, rising market doubts and lack of upside flexibility.
Derivatives market was overheated before the correction
Before the pullback occurred, the Bitcoin derivatives market was extremely overheated. The futures funding rate was hovering at around 0.1%, which is 10 times higher than the average 0.01%.
The rate of future financing is a process that achieves an equilibrium in the futures market by incentivizing long or short contract holders on the basis of market sentiment.
If there are longer contracts or customers on the market, the funding rate would be positive. If this is positive, buyers would pay short-sellers for a portion of their contracts every eight hours, and vice versa.
About all big cryptocurrencies saw their financing prices increase to about 0.1 per cent and 0.3 per cent, which indicated that the industry was highly over-extended.
When the market is overcrowded, the risk of long tightening rises, which could cause multiple futures contracts to be liquidated in a short amount of time.
Growing market uncertainty
According to researchers at Santiment, there is “trader doubt” in the market on whether BTC would hit $40,00 again. They wrote:
“Thinking face There is an increasing amount of trader doubt that #Bitcoin will revisit $40,000. But according to address activity and trade volume, the long-term trend still looks plenty healthy. Keep a close eye on whether $BTC’s usage rate stays propped up.”
The fundamentals of the Bitcoin blockchain network, such as address activity and trade volume, remain strong. However, the market sentiment has dwindled in the past week as BTC continues to struggle to break out of the $38,000 resistance area.
Lack of upside volatility
Bitcoin has seen sluggish responses from traders over the last few days, relative to the original recovery at $42,000 at the beginning of January.
In the early phase of the rally, once Bitcoin fell below main support thresholds, such as $35,000, there was also a huge reaction from traders.
However, since mid-January, buyers have had slower reactions at main levels of support. This suggests that the hopes of a rebound for the $40,000 to $42,000 support range have diminished, at least in the near term.
The selling pressure on Bitcoin came mainly from Asia in the first two weeks of January. But, as the overnight correction on Jan. 19 shows, Bitcoin has already continued to see volatility in the U.S. economy.
The mixture of reduced upside uncertainty and lack of upside traction appears to make markets more conservative in the short term. This is likely to mean that the BTC will see a protracted accumulation period until February.
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