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The price of Bitcoin (BTC) fell sharply from $ 37,800 to $ 35,000 overnight, liquidating $ 572 million worth of cryptocurrency futures positions.

There are three main reasons why the price of Bitcoin has fallen sharply in the past 12 hours. The reasons are one overheated derivatives market, growing doubt in the market and the lack of upside volatility.

BTC / USD 15 Minute Candle Chart (Bitstamp). Source: Tradingview

The derivatives market was overheated before the correction

Before the downturn, the Bitcoin derivatives market was extremely overheated. The funding rate for futures has hovered around 0.1%, which is 10 times higher than the average 0.01%.

Funding rates for BTC futures perpetual swaps. Source: Digital Assets data

The funding rate for futures is a mechanism that achieves equilibrium in the futures market by incentivising long or short contract holders based on market sentiment.

If there are more long contracts or buyers on the market, the funding ratio becomes positive. If it turns positive, buyers will have to offset short sellers every eight hours with some of their contracts, and vice versa.

Almost all major cryptocurrencies saw their funding rates rise to about 0.1% to 0.3%, meaning the market was extremely overloaded.

When the market is so crowded, the likelihood of a long-term squeeze increases, allowing many futures contracts to be liquidated in a short period of time.

Growing uncertainty in the market

According to Santiment researchers, there is “doubt among traders” in the market as to whether BTC would hit $ 40.00 again. They wrote:

“Thinking face. There is growing doubt from traders that #Bitcoin will revisit $ 40,000. But according to address activity and trading volume, the long-term trend still looks healthy. Keep a close eye on whether the usage rate of $ BTC remains high. “

Bitcoin price worries traders. Source: Santiment

The fundamentals of the Bitcoin blockchain network such as address activity and trading volume remain strong. However, market sentiment has eased over the past week as BTC continues to struggle to break out of the USD 38,000 resistance area.

Lack of upside volatility

Bitcoin has seen weak buyer response in recent days, compared to its initial $ 42,000 rally in early January.

During the early phase of the rally, whenever Bitcoin dropped to key support levels such as USD 35,000, there was often a big reaction from buyers.

However, since mid-January, there have been weaker buyer responses to major support levels. This indicates that expectations of a rally towards the USD 40,000 to USD 42,000 resistance area have declined, at least in the short term.

The selling pressure on Bitcoin came mainly from Asia in the first two weeks of January. But as evidenced by the nightly correction on January 19, Bitcoin is also starting to see weakness in the US market.

The combination of limited upward volatility and the lack of upward momentum seemingly causes traders to become cautious in the short term. This likely means that BTC is seeing a lengthy consolidation phase until February.