Bitcoin suffered a price collapse earlier on Thursday, after missing low margin records earlier this week.
The leading cryptocurrency by market value fell from over $ 19,300 to $ 16,327 at the start of European trading hours and was last seen near $ 17,200, which is a 10% drop on a 24 hours, according to data from CoinDesk 20.
The sudden drop caught many traders off guard, as the cryptocurrency was trading just 2% off its all-time high of $ 19,783 on Wednesday.
So what is behind the $ 3,000 drop? Here are three of the main factors responsible for the drop in prices:
1. Excessive leverage
“Bitcoin has been the victim of a great unwinding of leveraged transactions in derivatives listed on major exchanges,” Matthew Dibb, CEO of Stack Funds, told CoinDesk.
Almost $ 2 billion in derivative positions have been liquidated in the past 24 hours. Of that amount, more than $ 1.6 billion has been shut down in the past 12 hours, according to data source Bybit.
The unwinding of the leveraged trades was expected as the cost of holding long positions in the perpetual futures market, also known as the funding rate, rose sharply to a multi-month high of 0.098% over the past few days – a sign of over-indebtedness, or overheating, in the market. The finance rate is decided and paid every eight hours.
Also Read: Bitcoin Faces Rise In Volatility As Futures Market Shows Signs Of Overheating
With the fall in prices, the finance rate fell back to 0.011%, according to data source Glassnode. Indeed, the excess leverage has been squeezed out.
2. Technical withdrawal
Bitcoin’s rally from $ 10,000 to $ 19,400 seen over the past seven weeks appeared to be overloaded on the technical charts.
The momentum was so strong that the cryptocurrency consistently traded above its 10-day moving average (MA) throughout the climb, despite an overbought reading of the Relative Strength Index ( RSI) over 14 days.
Assets rarely experience a 90-degree rally as speculators tend to post profits at regular intervals, pushing prices up to their short-term moving averages. The cryptocurrency has seen several pullbacks of 20% or more in previous bull markets.
The price drop seen today brought the cryptocurrency well below its 10-day average and allowed the RSI to realign in a more favorable way for the bulls. “It’s a good setback,” said Dibb of Stack Funds.
According to chart analysts, price increases with steady declines are more durable than rises of nearly 90 degrees.
Some traders had positioned for pullback by buying put options or bearish bets as reported by Deribit Insights.
3. Other factors amplified the sale
According to trader and analyst Alex Kruger, Coinbase CEO Brian Armstrong tweet thread On rumors about the US Treasury Department’s plans to track owners of self-hosted cryptocurrency wallets weakened the bullish move, allowing prices to pull back.
“This [regulatory concerns], amid euphoria and unsustainable high leverage among longs, led to the biggest 24-hour drop since March, ”Kruger told CoinDesk in a Telegram chat.
“However, if what Armstrong talked about comes to fruition, it would be extremely bearish. At the moment, I consider this highly unlikely (short term), ”Kruger said.
The downward movement may have also been amplified by prominent cryptocurrency exchange OKEX’s announcement that it would resume withdrawals.
“Most bitcoins frozen [on OKEx] had traded around 70%, so there was a lot of unrealized profit stuck there, ”Sui Chung, CEO of CF Benchmarks, said in a statement provided to CoinDesk. “Once these coins were free to move, it is likely that many traders sold them for dollars and stablecoins to achieve these gains, which increased the selling momentum.
Bitcoin had already fallen to around $ 17,600 when the exchange lifted the suspension at 08:00 UTC today and fell to $ 16,350 within an hour. OKEx suspended withdrawals on October 16 when bitcoin traded close to $ 11,500.
Also read: OKEx sees biggest Bitcoin exit in 6 months soon after withdrawals resumed
The path of least resistance for bitcoin remains on the upper side. “The latest price drop is a noise against the broader uptrend,” Kruger said.
Indeed, bullish macro factors such as increased institutional participation, record printing of money by central banks and the search for yield remain intact despite falling prices.
The sense of detention remains strong on Thursday, with the number of coins held on cryptocurrency exchanges at 2,384.913, the lowest level since August 2018, according to data source Glassnode.
The data suggests that investors view the current decline as a pullback from the bull market and remain confident about the cryptocurrency’s long-term outlook. The metric has declined by more than 17% this year, which means there has been a drop in liquidity in the market.
Finally, the fall in prices today eliminated the excessive leverage, as shown above. With the cost of holding long positions normalizing, bitcoin can now trace a more sustained rally to record highs.
Crypto Broker’s Heusser expects the cryptocurrency to consolidate in a range of $ 17,500 to $ 19,000 in the near term before resuming its uptrend.
“Bitcoin has not yet reached its 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 are not all-in, but add funds when they go up or down. “
Also read: Bitcoin Price Drops Nearly $ 3,000 With Strongest Sell In 12 Weeks