The price of Bitcoin (BTC) fell to $ 53,905 at Binance overnight last Saturday (20), registering a sudden drop of 6%. But despite the minor correction, the cryptocurrency recovered quickly after that, reaching a new all-time high above $ 57,800 on Sunday (21).
Why did Bitcoin fall and recover so quickly?
Although Bitcoin experienced a sharp devaluation in just a few hours, analysts pointed out that the cryptocurrency fell exactly to the bottom of a short-term trend line.
John Cho, director of expansion at Ground X, noted that the decline was a filling of liquidity positioned at a lower price than that practiced by the market.
– John Cho (@JohnCho__) February 21, 2021
“BTC price just needed a little liquidity, that’s all.”
A liquidity fill simply is when the price of a cryptocurrency drops after stabilizing in the market, just to fill purchase orders at the bottom of the range.
In addition, a drop was expected because Bitcoin was consolidating with the rate of financing in the futures market around 0.15%.
On major exchanges operating in the futures market, the Bitcoin futures financing rate fluctuated between 0.1% and 0.2%, and was particularly high for pairs of stablecoins.
Exchanges that operate Bitcoin futures use a mechanism called financing to encourage buyers or sellers based on market sentiment.
For example, when there are more buyers on the market, the rate of financing becomes positive. When this happens, buyers must ‘pay’ part of their position to sellers every eight hours.
When the financing rate is high, but the price of Bitcoin is consolidating in the market, the risk of a big fall in the short term increases.
This movement was observed during the night of Friday (20), when Bitcoin fell more than 6% in the market. Although the funding rate remains close to 0.1% today, the cryptocurrency has not fallen since.
Meanwhile, the financing rate for altcoins, including altcoins like Ethereum (ETH) and DeFi projects, has been reset to about 0.05%. As a result, the price of altcoins had a stronger jump than Bitcoin.
There is a great risk
In the short term, Bitcoin faces a big risk due to the rise in the U.S. Treasury curve. When the Treasury curve rises, historically, risky assets, such as stocks, tend to fall.
Last week, the US stock market faced a very sharp correction, showing a clear correlation with the Treasury curve.
However, it remains uncertain whether Bitcoin would react in the same way, since it is not only considered a risky asset, but also as a store of value in the face of inflation, which means that BTC could offset the risk of the Treasury curve .
What’s more, the correlation between Bitcoin and other financial assets, including stocks and gold, has been decreasing since September 2020.
Thus, there is a possibility that Bitcoin will act as a store of value in the face of inflation, opposing the upward curve of the United States Treasury. If so, the BTC may remain unperturbed, particularly given the current strength of the price hike.
Misa Christanto, an analyst at Messari, said that in a bear market, everything correlates. But Bitcoin, which is also considered a “reflective market”, tends to be resilient. Is it over there said :
“The US Treasury curve is sharpening. Why should we care? Because in a bear market, everything is correlated. So far, the headwinds have been on stock returns, on unprofitable technology names. Negotiations reflections such as BTC were not affected. “