Bitcoin suffered a price slump early Thursday, having missed all-time highs by a tight margin earlier this week.
The best cryptocurrency by market value fell from over $ 19,300 to $ 16,327 during the early European trading hours and was last seen around $ 17,200, representing a 10% drop on a 24-hour basis, according to data. by CoinDesk 20.
The sudden drop caught many traders off guard as the cryptocurrency was trading just 2% below its record high of $ 19,783 on Wednesday.
So what’s behind the $ 3,000 drop? Here are three of the main factors responsible for falling prices:
1. Excess leverage
“Bitcoin has fallen victim to a major close of leveraged derivatives trades listed on major exchanges,” Matthew Dibb, CEO of Stack Funds, told CoinDesk.
In the past 24 hours, derivatives positions of nearly $ 2 billion have been liquidated. Of that, more than $ 1.6 billion was closed in the past 12 hours, according to data source Bybit.
The dissolution of leveraged trades was expected, as the cost of holding long positions in the perpetual futures market, also known as the funding rate, had risen sharply to a multi-month high of 0.098% in recent days – a sign of overleveraging, or overheating, in the market. The financing rate is set and paid every eight hours.
Also Read: Bitcoin Faces Rising Volatility As The Futures Market Shows Signs Of Overheating
As prices fell, the funding rate dropped to 0.011%, according to data source Glassnode. Indeed, excess leverage has been eliminated.
2. Technical withdrawal
Bitcoin’s rally from $ 10,000 to $ 19,400 over the past seven weeks seemed excessive in the technical charts.
The momentum was so strong that the cryptocurrency was consistently trading above its 10-day moving average (MA) on the way up, despite an overbought reading on the 14-day relative strength index (RSI).
Assets rarely see a 90-degree rally, as speculators tend to post profits at regular intervals, pushing prices down to their short-term moving averages. The cryptocurrency has seen several pullbacks of 20% or more during the previous bull markets.
The price drop seen today took the cryptocurrency well below its 10-day average and allowed the RSI to realign more favorably to the bull. “It’s a healthy retreat,” said Stack Funds’ Dibb.
According to chart analysts, price hikes with regular pullbacks are more sustainable than nearly 90 degree hikes.
Some traders had positioned for the pullback by buying put options or bearish bets, as noted by Deribit Insights.
3. Other factors boosted sales
According to trader and analyst Alex Kruger, Coinbase CEO Brian Armstrong tweet thread US Treasury Department plans to track down owners of self-hosted cryptocurrency wallets weakened the bullish move, allowing for a price pullback.
“This [regulatory concerns], in a context of euphoria and unsustainable high leverage among longs has led to the largest drop in the 24 hours since March, “Kruger told CoinDesk in a Telegram chat.
“However, if what Armstrong talked about were to be, it would be extremely bearish. As of now, I see it highly unlikely (in the short term), “Kruger said.
The move to the downside may also have been amplified by the announcement of the prominent OKEX cryptocurrency exchange that it would resume withdrawals.
“Most of the bitcoin frozen [on OKEx] had traded around 70%, so there were a lot of unrealized profits stuck there, “said Sui Chung, CEO of CF Benchmarks, in a statement provided to CoinDesk.” Once these coins have been free to move, it’s likely that many traders sold them for dollars and stablecoins to make those gains, adding more momentum to the sale. “
Bitcoin had already dropped to around $ 17,600 when the exchange lifted the suspension today at 08:00 UTC, and dropped to $ 16,350 over the next hour. OKEx suspended withdrawals on October 16 when bitcoin was trading close to $ 11,500.
Read also: OKEx sees largest bitcoin outflow in 6 months shortly after resumption of withdrawals
The path of least resistance for bitcoin remains on the higher side. “The latest drop in prices is a rumor against the broader uptrend,” Kruger said.
Indeed, macro bullish factors such as rising institutional holding, central banks’ record money printing and the search for yield remain intact despite falling prices.
Maintenance sentiment remains strong on Thursday, with the number of coins held in cryptocurrency exchanges at 2,384,913, the lowest level since August 2018, according to data source Glassnode.
The data suggests that investors see the current decline as a bull market pullback and remain confident on the long-term outlook for the cryptocurrency. The metric has fallen by over 17% this year, which means there has been a drop in liquidity in the market.
Finally, today’s collapse in prices eliminated excessive leverage, as noted above. With the cost of holding long positions normalized, bitcoin can now chart a more sustained rally to all-time highs.
Crypto Broker’s Heusser expects the cryptocurrency to consolidate in the $ 17,500 to $ 19,000 range in the short term before resuming its uptrend.
“Bitcoin has yet to peak,” said Siddharth Menon, co-founder and COO of the Mumbai-based exchange WazirX. “I also see a lot of professional traders taking positions in bitcoin. These are healthy positions because they don’t go all-in, but add funds as they go up or down.”
Read also: Bitcoin’s price drops nearly $ 3,000 with the sharpest sell-off in 12 weeks