Market X-Ray: What comes next for Bitcoin following 26% plunge?
as always, the market newsletter is split into two parts: Bitcoin outlook by Joseph and on-chain analysis by Cole.
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The Bitcoin outlook
The Bitcoin price dropped substantially in the last 24 hours. Within 2 days, it dropped by 26%, recording a steep correction.
There are many reasons why Bitcoin could have dropped in the past two days. To name a few:
BTC miners sold
The dollar index (DXY) rose
Certain whales sold
U.S. Treasuries are up
Stocks corrected on Monday morning amid some uncertainty
Certain institutions (we’re looking at you Guggenheim) began to take money off the table.
But, the most important reason why the Bitcoin price dropped so quickly is the overcrowded futures market.
The funding rate of the futures market consistently stayed above 0.1% as Bitcoin dropped.
This means that the majority of the market was longing Bitcoin as it was dropping.
When the funding rate increase, the probability of a long squeeze increases. Hence, the loop of investors buying the dip and getting squeezed continued.
Kraken and Coinbase also had problems during the correction.
Willy Woo, an on-chain analyst, explained that the exchange issues likely caused issues for algorithms trading cryptocurrencies, further pushing the price down. He said, “a false bearish signal to algos, which will trigger further sell-off. “
So what happens next?
In the short term, I expect Bitcoin to consolidate. Bitcoin is continuing to decline while the funding goes up, which is a bad combination.
The reason for this is simple. The futures market is still extremely overheated and in “dip buying more.”
More buyers have to get flushed out and the derivatives market needs to reset.
So I expect something like this: Bitcoin drops to $30,000s once again, recover throughout the week, and eventually began to rally.
When the price of Bitcoin is showing this much volatility, it is important to consider whether the market is overheated or not.
The futures data show that the market is highly overcrowded at the moment, despite the fall to $32,500.
So in the near term, the ideal trade is to wait for the funding rate to decline. The funding rate has to neutralize for the market to calm down and stabilize.
You can check the funding of all major cryptocurrency exchange rates on Bybt.com.
One positive macro factor is that whales have been buying up more BTC throughout the drop.
This shows that high-net-worth investors remain highly optimistic around Bitcoin.
A small note
Bitcoin is still suffering from the same problems seen on March 12 of last year.
The March 12 crash occurred [when Bitcoin price dropped to $3,600 because of market structure inefficiencies.
Some exchanges could not handle that kind of support, causing large traders and even hedge funds to find it difficult in maintaining their positions.
Coinbase and Kraken saw issues on January 11.
I am not confident whether the exchange infrastructure has improved significantly, and this is certainly a bad look for crypto exchange infrastructure.
Market X-Ray and on-chain analysis by Cole Petersen
It has been a rocky past few days for Bitcoin and the entire cryptocurrency market. BTC’s inability to gain a strong foothold above $40,000 led to massive inflows of selling pressure that are showing few signs of letting up.
Fortunately – at least for the time being – Bitcoin has been able to establish $30,000 as a strong support level, though bulls have yet to post any aggressive response to this level.
It does appear that the decline from Bitcoin’s recent highs of over $40,000 first began due to a flurry of selling pressure from its miners, who often determine local tops when they start selling.
This selling has subsided, with spot selling on exchanges like Coinbase driving the latter part of this recent retrace.
Tracking the ebb and flow of Bitcoin miners
While Bitcoin was consolidating at just over $40,000, the cryptocurrency’s Miner Position Index (MPI) spiked, indicating that miners were in the process of offloading a significant quantity of coins.
Historically, this index peaking has marked local tops, but it doesn’t mean that a parabolic advance will be invalidated.
CryptoQuant CEO Ki Young Ju spoke about this in a recent post while BTC was still hovering above the $40,000 level, concluding that it makes sense to add short exposure when the MPI reaches historically high levels.
“Miner Position Index looks enough to make a local top. They're selling BTC. I'm going to punt a small short to scalp BTC in this short-term bearish market.”
They may still be offloading some of their holdings, but responsibility for this decline has shifted largely away from miners and towards retail investors for the latest portion of the movement.
Retail selling frenzy: Spot sellers drive Bitcoin crash
Although the $40,000 rejection and decline below this level may have been sparked by miners, retail investors, who likely think $40,000 will end up being similar to the $20,000 top in 2017, have driven the latest leg down.
Data from analytics platform Coinalyze elucidates this selling, as one analyst pointed to in the below chart:
The stream of spot selling pressure has slowed significantly and may begin transitioning to buying as the U.S. trading session continues.
Joseph Young is a cryptocurrency analyst who has been in the space since 2014. He contributes to Forbes, CoinTelegraph, and a host of other top crypto news sites. Over his 6+ years in the space, he has built countless connections with industry leaders and has amassed over 100,000 followers on Twitter.
Nick Chong is a passionate crypto researcher who specializes in identifying and extracting conclusions from trends within the rapidly emerging DeFi-space. He has been involved in the crypto markets since 2016, and sources deals for a Vancouver-based crypto venture fund.
Cole Petersen first learned about Bitcoin in 2013 and began working in the space in 2017. While on a gap year as a student at the University of California, Irvine, he now leads LINKPAD, a DAO-owned venture capital fund, and does part-time work as an associate at BlockVenture.
Pepe of the Day:
Pepe the Frog has become the unofficial mascot of the crypto markets, so we feel it is only fitting to add a “Pepe of the Day” section highlighting only the finest and rarest Pepes.
Today’s featured Pepe: “Suffer in silence”