Bitcoin saw a sharp decline early Monday, shortly after preparing for a compelling move above $ 50,000.
The top cryptocurrency fell from nearly $ 49,000 to $ 45,926 in the early Asian hours, and was last switched near $ 47,790 – a 1.8% drop on the day, according to data from CoinDesk 20.
The decline surprised many investors as an all-time notable milestone was on the cards given the optimism generated by the recent surge in institutional adoption.
So what happened Here are three reasons that can explain the sudden drop in prices.
1. Finance stress
“Bitcoin and other cryptocurrencies were generally looking overheated, and the Asian session’s decline was likely a ‘funding reset’ required for a sustained move above $ 50,000,” said Matthew Dibb, COO and co-founder of Stack Funds CoinDesk
In fact, the cost of holding long positions in Bitcoin’s perpetual futures market, also known as the refinancing rate, rose to a 12-month high of 0.109% on Sunday, indicating excessive upward movement or overheating in the market.
Average Perpetual Funding Rate
Source: Glassnode
The average funding rate rose in late January and hit a multi-month high following Tesla’s disclosure of Bitcoin investments last Monday. This suggests that the recent rally below $ 40,000 was mainly due to leverage in derivatives. Therefore, there was always a risk of funding being cut back.
The drop in prices has so far liquidated Bitcoin long positions worth over $ 300 million, according to data source Coinalyze – that’s roughly 30% of the total $ 1.33 billion long liquidations observed in the crypto market.
All coins: long liquidations (forced closure of sales transactions)
Source: Coinalyze
Many alternative cryptocurrencies like XRP, XLM, LINK, ADA and some decentralized, financially-linked tokens saw double-digit price drops in the Asian session that overshadowed Bitcoin’s 6% decline. The larger sell-off contributed to declining pressure on Bitcoin, according to Dibb.
According to a tweet from market analyst Josh Rager, the altcoin rally had become “euphoric” last week, which meant a price drop was long overdue.
2. Institutional demand weakened
Analysis firm CryptoQuant’s Coinbase premium indicator turned negative on Sunday due to weak demand from major investors.
The indicator measures the spread between Coinbase Pro’s BTC / USD pair and Binance’s BTC / USDT pair, including the USD-linked stablecoin tether. The indicator is widely followed by traders as Coinbase Pro is synonymous with high net worth individuals and institutional investors. A positive spread implies strong institutional inflows and vice versa.
Coinbase Bitcoin Premium against price in USD
Source: CryptoQuant
“The premium fell to nearly $ 80 in the early European hours on Sunday and stayed largely neutral when the price ranged from $ 48,000 to $ 49,000,” CryptoQuant CEO Ki-Young Ju told CoinDesk. “Inflow of weak points signaled scope for corrections.”
Bitcoin’s rally near $ 10,000 since early October has been fueled in large part by increased demand from wealthy individuals and institutions. The cryptocurrency traded consistently at a Coinbase premium of around $ 100 throughout the four-month bull market, with the few negative premiums paving the way for price declines.
Market analyst Joseph Young cited a negative Coinbase premium and stagnant grayscale inflows as price bearish development on Sunday, pointing to USD 48,000 as the level the bulls should beat.
7-day average of grayscale Bitcoin inflows
Source: Glassnode
The seven-day average of grayscale inflows peaked in mid-January and has been trending south (apart from a spike on Friday) since then, according to the Glassnode data source. While private investors trade on the spot market, many institutional investors are involved in Bitcoin through the regulated Grayscale Bitcoin Trust (GBTC).
New York-based Grayscale is owned by the Digital Currency Group, the parent company of CoinDesk.
3. Chart driven factors
The recent surge from $ 30,000 to $ 49,000 lacked volume support from popular exchanges like Coinbase.
Bitcoin daily chart
Source: TradingView
The 10-day moving average of daily volume has been falling since the beginning of February. A small increase in price is often short-lived and tends to withdraw suddenly, similar to what happened this morning.
A broader bias remains bullish
The recent decline in Bitcoin price is typical of pullbacks seen during the previous bull markets, and the path of least resistance remains on the higher side.
“We’ll probably (I think) make a quick and minor fix now, but we’re still in the middle of a violent bull run that is about to get more violent,” tweeted Ari Paul, CIO of BlockTower Capital.
Analysts said more institutes could soon emulate Tesla’s move to diversify cash holdings into Bitcoin, resulting in a compelling move above $ 50,000.
At press time, the perpetual funding rate has normalized to 0.05% and the Coinbase premium has bounced back to $ 50. Bitcoin has regained some balance in the past few hours to trade well above $ 47,000.
Also read: Bitcoin sets new all-time high of $ 49.7,000 and brings $ 50,000 within striking distance
