Bitcoin declined early Monday, shortly after what it looked like for a convincing move of more than $ 50,000.
The top crypto-currency fell from nearly $ 49,000 to $ 45,926 during the early Asian hours and was last downgraded from close to $ 47,790 – 1.8% lower, according to CoinDesk 20 data.
The decline surprised many investors, as a remarkable milestone of all time looked on the charts amid the optimism caused by the recent wave of institutional adoption.
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So what happened? Here are three reasons that may explain the sudden drop in price.
1. Funding stress
“Bitcoin and other cryptocurrencies generally appear to be overheating, and the decline in the Asian session was likely a ‘recovery in funding’ needed for a sustained move of more than $ 50,000,” said Matthew Dibb , chief operating officer and co-founder of Stack Funds, told CoinDesk.
The cost of holding long positions in the perpetual futures market of bitcoin, also known as the funding rate, rose to a high of 0.109% in 12 months on Sunday, indicating excessively strong leverage or overheating in the market.
The average funding rate began to rise at the end of January and rose to a peak of several months in the wake of Tesla’s announcement of bitcoin investments last Monday. This suggests that the recent rally of less than $ 40,000 was driven primarily by leverage. As such, there was always the risk that funding would be restored.
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The price drop has so far liquidated more than $ 300 million worth of bitcoin positions, according to data source Coinalyze – that’s about 30% of the total long-term $ 1.33 billion liquidations observed in the crypto market.
Many alternative cryptocurrencies, such as XRP, XLM, LINK, ADA and a number of decentralized financially linked grants, had double-digit price declines during the Asian session, overshadowing the decline of bitcoin by 6%. According to Dibb, the larger sales added to bearish pressure around bitcoin.
According to a tweet from market analyst Josh Rager, the altcoin rally last week became ‘euphoric’, meaning a price drop was overdue.
2. Institutional demand weakens
The Coinbase premium indicator from the analytics firm CryptoQuant turned negative on Sunday in a sign of weak demand from large investors.
The indicator measures the spread between Coinbase Pro’s BTC / USD pair and Binance’s BTC / USDT pair, which includes the USD linked stablecoin bond. The indicator is widely followed by traders, as Coinbase Pro is considered synonymous with individuals with large net worth and institutional investors. A positive spread implies strong institutional inflow and vice versa.
“The premium dropped to nearly $ 80 during Sunday’s early European hours and remained largely neutral as the price fluctuated between $ 48,000 and $ 49,000,” CryptoQuant CEO Ki-Young Ju told CoinDesk. “Poor inflow of stains indicates that it is ready for repair.”
Bitcoin’s rally from early October to $ 10,000 lows was largely fueled by rising demand from high-value individuals and institutions. The cryptocurrency consistently traded at a Coinbase premium of around $ 100 during the four-month bull market, with the few instances of negative premiums paving the way for price volatility.
Field developer Joseph Young quoted negative a Coinbase premium and stagnant gray scale inflows as price-clumsy developments on Sunday, while pointing to $ 48,000 as the level to beat for the bulls.
The average of seven days of gray scale inflows peaked in mid-January and has since been southward (according to a rise Friday), according to data source Glassnode. While retail investors trade in the spot market, many institutional investors gain exposure to bitcoin through the regulated Grayscale Bitcoin Trust (GBTC).
New York-based Grayscale is owned by Digital Currency Group, the parent company of CoinDesk.
3. Graph-driven factors
The recent rise from $ 30,000 to $ 49,000 has not supported volume on prominent wallets such as Coinbase.
The moving average of ten days of daily volume has been declining since early February. A price increase with a low volume is often of short duration and is prone to sudden withdrawals, similar to those seen early in the day.
Broader bias remains bullish
Bitcoin’s latest price drop is typical of withdrawals observed during previous bull markets, and the path of least resistance remains to the higher side.
“We are probably (I think) going to make a short and minor correction now, but we are still in the midst of a violent bull run that will soon be more violent,” said Ari Paul, head of BlockTower Capital, tweeted.
According to analysts, more institutions could soon follow Tesla’s move to diversify cash holdings in bitcoin, leading to a convincing move of more than $ 50,000.
At press time, the perpetual funding rate normalized to 0.05% and the Coinbase premium recovered to $ 50. Bitcoin has recovered slightly over the past few hours to trade well above $ 47,000.
Also read: Bitcoin sets a new everyday high of $ 49.7K, which puts $ 50K within striking distance