The cryptocurrency market in the past few days have been quite difficult. Since February 20, the total market cap has fallen by around $360 billion following the dip in major coins.
Since its all-time high, Bitcoin has fallen by about $13,000 and in the last 24 hours alone it has lost about 15% of its price. The following are some possible reasons for the BTC price drop.
BTC Price Market Correction
It’s worth noting that before the recent correction, the market was in a parabolic state. While the “up only” concept sounds appealing, there are some warning which will allow investors to take some profits off the market at some point.
It’s only natural and healthy. More importantly, the bull market hasn’t seen as many major corrections compared to 2017. Then the market has observed at least 6 corrections with an amplitude of 30% or more, so we haven’t seen any so far.
Compared to traditional financial markets, Bitcoin has historically been more volatile, and a 30% correction is expected at some point. It is important to remember that unrealized gains are not realized gains. Given the parabolic rise in Bitcoin prices, the rebound since the latter half of last year has increased the likelihood that people will take some money off the market. After all, despite recent adjustments, BTC has risen 300% since October.
Excessive Leverage Market Long-Term Pressure
Another thing to consider is that the market is overloaded and long positions have the largest share. Data from Bitfinex, one of the leading cryptocurrency exchanges, shows that BTC longs peaked at around 29,000 on February 21. The table shows what happened next:
Bitcoin Leveraged Long Term. Source: TradingView
From the top it can be clearly seen that a large number of long positions have been squeezed, thereby liquidating more than 21% of the long positions. As prices continue to clear at an accelerated rate, this triggers a cascade effect.
Looking ahead, the rate of funding of margin positions has also peaked and is urgently needed to be reset. Data from CryptoQuant, a popular analytical resource, shows that the latest revision has increased the funding rate by 30 days, giving more entry for leveraged investors.
Funding Rates. Source: CryptoQuant
Correlation with Stock Market
A closer look at the performance of some major stock indices (such as Standard & Poor’s 500 and Nasdaq 100) found that there is a close relationship between traditional financial markets and Bitcoin prices.
S&P 500, NASDAQ 100, Bitcoin. Source: TradingView
As shown in the graph above, prices in all three countries have been highly correlated over the past three weeks and similar corrections have been made.
It is true, however, that associations do not always indicate cause and effect, but in the events of the past seven days, the concept makes sense. After all, Bitcoin is still a relatively risky game for most investors, and it makes sense to liquidate some profits to offset the potential losses caused by the downturn in the traditional financial market.
This is especially true when the Nasdaq has seen its biggest drop since October 2020. This is because government bond yields rocked the market and investors preferred companies that would benefit from a broader economic recovery later in the year.
Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia said, “Rate matters. At 1.5%, the yield is comparable to S&P 500 dividend yield and there’s no capital risk with a 10-year, you’ll get your principal back. All of a sudden it’s competitive with stocks.”