The price of Bitcoin (BTC) fell overnight to $ 53,905 on Binance, which recorded a sudden drop of 6%. But despite the slight correction, the price of Bitcoin then recovered quickly and on February 21 reached a new high of more than $ 57,800.
Why did Bitcoin fall and recover so quickly?
Although Bitcoin saw a sharp decline within hours, analysts found that it was falling to the exact bottom of a short-term trend line.
John Cho, the director of Global Expansion at Ground X, noted that the drop was a liquidity fill at a lower price.
$ BTC just need a little liquidity, that’s all. https://t.co/XTeAYPROWz pic.twitter.com/zlkcBAAI4x
– John Cho (@JohnCho__) 21 February 2021
A liquidity fill simply means when an asset falls after it has stagnated to fill buy orders at the bottom of the range
A decline is expected as Bitcoin consolidates with the futures rate at around 0.15%.
Over large futures exchanges, the Bitcoin futures rate fluctuated between 0.1% and 0.2%, and was particularly high for stable pairs.
Bitcoin futures exchanges use a mechanism called financing to encourage buyers or sellers based on market sentiment.
For example, if there are more buyers in the market, the financing rate becomes positive. If this happens, buyers will have to pay a portion of their position to sellers every eight hours.
If the financing rate is high but the price of Bitcoin consolidates, the risk of a large short-term decline increases.
This trend is what happened overnight on February 20, as Bitcoin fell by more than 6%. Although the financing rate remains close to 0.1%, it has fallen significantly since then.
The funding rate for altcoins, including Ether (ETH) and DeFi tokens, has been reduced to around 0.05%. As such, altcoins have seen a stronger bounce than BTC.
There is one big risk in the foreseeable future
In the short term, Bitcoin is at great risk due to the rise of the US Treasury curve. If the treasury curve rises, risk assets such as equities tend to decline.
Over the past week, the US stock market has adjusted quite strongly, showing a clear connection with the treasury curve.
However, it remains uncertain whether Bitcoin will react in the same way, as it is not only seen as a risk asset, but also as an inflation hedge, meaning it could counteract the risk of the treasury curve.
What’s more, the correlation between Bitcoin and other assets, including equities and gold, has been declining since September 2020.
Thus, there is a possibility that the inflation hedging aspect of Bitcoin is facing the rising treasury curve. If this is the case, BTC can remain intact, especially given the current strength of the bull run.
Misa Christanto, an analyst at Messari, said everything in a bear market correlates. But Bitcoin, also considered a ‘reflection trade’, was resilient. His wrote:
“The U.S. Treasury curve is weakening. Why should we care? Because in a bear market, everything is correlated. So far, the backlash on returns has been on stocks, with unprofitable technology names. Reflation does not trade like $ BTC.”