The price of Bitcoin (BTC) fell to $ 53,905 at Binance overnight, registering a sudden drop of 6%. But despite the small correction, Bitcoin’s price rebounded quickly after that, reaching a new all-time high above $ 57,800 on February 21.
Why did Bitcoin fall and recover so quickly?
Although Bitcoin saw a sharp drop in just a few hours, analysts pointed out that it fell right at the bottom of a short-term trend line.
John Cho, Director of Global Expansion at Ground X, noted that the drop was a fill of liquidity at a lower price.
$ BTC I just needed a little liquidity, that’s all. https://t.co/XTeAYPROWz pic.twitter.com/zlkcBAAI4x
– John Cho (@JohnCho__) February 21, 2021
A liquidity fill simply means when an asset falls after it stagnates to fill purchase orders at the bottom of the range
A drop was expected because Bitcoin was consolidating with a future funding rate of around 0.15%.
On major futures exchanges, the Bitcoin futures financing rate fluctuated between 0.1% and 0.2%, and was particularly high for stable currency pairs.
Bitcoin futures exchanges 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 have to pay sellers a portion of their position every eight hours.
When the financing rate is high, but the price of Bitcoin is consolidating, the risk of a big drop in the short term increases.
This trend is what happened overnight on February 20, when Bitcoin fell more than 6%. Although the financing rate remains close to 0.1%, it has dropped substantially since then.
The financing rate for altcoins, including Ether (ETH) and DeFi tokens, has been reset to around 0.05%. As such, altcoins took a stronger leap than BTC.
There is a big risk in the foreseeable future
In the short term, Bitcoin faces a great risk due to the increase in the U.S. Treasury curve. When the Treasury curve has historically increased, risky assets, such as stocks, tend to fall.
Last week, the American stock market corrected itself quite sharply, 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 an inflation hedge, which means it could counter the risk of the Treasury curve.
What’s more, the correlation between Bitcoin and other assets, including stocks and gold, has been decreasing since September 2020.
Thus, there is a possibility that the Bitcoin inflation hedge aspect opposes the Treasury’s upward curve. If so, the BTC may remain undisturbed, particularly given the current strength of the bullish run.
Misa Christanto, an analyst at Messari, said that in a bear market everything correlates. But Bitcoin, which is also considered a “reflective trade”, has resisted. Is it over there wrote:
“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. “