Bitcoin (BTC) experienced a tough week, with a significant drop of over $4,500, falling below the important $67,000 support level. This sudden price decline led to a wave of liquidations on trading platforms, resulting in a staggering loss of $427 million within just one day, according to data from CoinGlass.
Analysts are working to identify the precise cause of this downturn, drawing clues from the options market and activities on retail exchanges.
Options Market Predicted the Downturn
QCP Capital, a trading firm focusing on crypto, suggests that the options market played a role in initiating the downward trend. Their analysis showed a downside risk in risk reversals within the options market prior to the price drop. This implied that some options traders had foreseen a potential decline and positioned themselves accordingly.
Retail Trading Intensity Drives Volatility
The sharp decline was intensified by significant liquidations on retail-focused exchanges like Binance. Perpetual funding rates, indicating market sentiment on leverage, saw a dramatic change.
Rates dropped from a high 77%, reflecting strong bullish sentiment with leveraged positions mainly betting on price increases, to a neutral position in a short period. This quick unwinding of leveraged positions increased price volatility, leading to a self-fulfilling prophecy as falling prices triggered more margin calls and forced selling.
Long Positions Hit Hard
The major impact of the liquidations affected long positions, which were bets anticipating price increases. A substantial $342 million of the total liquidations came from these optimistic positions. Bitcoin itself faced most of the pressure, with over $130 million in long positions forcefully liquidated.
Highlighting Crypto’s Risks
This event underscores the risks and high volatility present in the crypto market. When prices unexpectedly plummet, traders using leverage are compelled to sell their holdings at a loss to meet margin demands. This rush to sell can further drive price drops, creating a dangerous cycle.
Related Reading: Spot ETF Hype Cools Down – Are Bitcoin Investors Changing Focus Now?
Future of Bitcoin
Although Bitcoin has rebounded slightly from the initial plunge, stabilizing around $66,500, the recent turmoil has certainly shaken investor confidence.
The upcoming weeks will be critical in determining if this is just a temporary setback or the beginning of a prolonged correction for Bitcoin. The question of whether the bulls can regain control or if bears will continue to dominate the market remains unanswered.
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