After what seemed like an eternity, Bitcoin [BTC] bulls are finally charging. It delivered an impressive upside, particularly in the last two days, confirming the return of volatility, which was not the case in recent weeks.
Bitcoin’s mid-week rally may entice many traders to buy back in anticipation of further gains. One of the reasons for the recent rally could be a double-edged sword that investors should be cautious of. Low volumes and unfavourable market conditions contributed to a bearish outlook, with many investors expecting further declines.
Leveraged short liquidations trigger more sell pressure
A week ago, we observed higher demand in the derivatives market than in the spot market. One of the potential reasons for this was higher leveraged positions. Since most traders expected more downside, most of the leveraged positions were short sellers. As a result, Bitcoin’s upside in the last two days resulted in severe liquidation of leveraged short positions.
More than 16,000 leveraged short positions were liquidated in the last 24 hours, at press time. Interestingly, Bitcoin funding rates dropped during the same period, suggesting that most of the BTC demand was for short positions. Hence, the drop when the price started rallying.
The same metrics revealed a drop in leveraged shorts liquidations, confirming that traders are exiting their positions. Bitcoin’s estimated leverage ratio remains high despite the liquidations. A confirmation that investors are now switching to long trades.
The switch to leveraged longs underscores the same reasons for which the market has seen an increase in mid-week volatility. Highly leveraged positions lead to more price sensitivity. A move against the expected direction leads to heavy liquidations.
A look at Bitcoin’s spot demand also revealed that whales have been accumulating, but demand is still low. Addresses holding more than 100 BTC and those with more than 1000 BTC demonstrated a slight uptick over the last 2 days.
Despite this upside, however, the Purpose Bitcoin ETF, one of the most important institutional indicators, did not register much upside. This, combined with the relatively low demand by whales, suggests a significant likelihood that the latest upside might be limited.
What of Bitcoin’s price action?
Bitcoin is bound to experience a sell-off sometime soon as investors start taking profit. Bitcoin was trading at $20,909, at press time, after an 8% upside in the last 24 hours.
Earlier in the week, we highlighted the potential for a breakout or breakdown from its wedge pattern. The outcome has favoured the bulls, but the price is now approaching the overbought zone. This means we might see the return of selling pressure, but that will likely be above the $22,000-range.
Bitcoin investors should proceed with caution, especially considering that the market is characterized by low institutional and whale demand. A high leverage ratio may subject Bitcoin to more sensitivity towards sell pressure.