The price of Bitcoin (BTC)
dipped to as low as $53,905 on Binance overnight, recording a sudden 6%
drop. But despite the minor correction, the price of Bitcoin quickly
recovered thereafter, reaching a new all-time high above $57,800 on Feb.
21.
Why did Bitcoin drop and recover so quickly?
Although
Bitcoin saw a steep drop within merely hours, analysts pinpointed that
it fell to the exact bottom of a short-term trendline.
John Cho, the Director of Global Expansion at Ground X, noted that the drop was a liquidity fill at a lower price.
A liquidity fill simply means when an asset drops after stagnating to fill buy orders at the bottom of the range
A drop was expected because Bitcoin was consolidating with the futures funding rate at around 0.15%.
Across
major futures exchanges, the Bitcoin futures funding rate was hovering
between 0.1% to 0.2%, and it was particularly high for stablecoin pairs.
Bitcoin futures exchanges use a mechanism called funding to incentivize buyers or sellers based on market sentiment.
For
example, when there are more buyers in the market, the funding rate
turns positive. When that happens, buyers have to pay sellers a portion
of their position every eight hours.
When the funding rate is high but the price of Bitcoin is consolidating, the risk of a big short-term drop increases.
This
trend is what occurred overnight on Feb. 20, as Bitcoin declined by
more than 6%. Although the funding rate remains near 0.1%, it has
dropped substantially since.
The funding rate for altcoins, including Ether (ETH) and DeFi tokens, reset to around 0.05%. As such, altcoins saw a stronger bounce than BTC.
There is one major risk in the foreseeable future
In
the near term, Bitcoin faces a major risk due to the U.S. Treasury
curve rising. When the Treasury curve rises, historically, risk-on
assets like stocks tend to drop.
In the past week, the U.S. stock market has corrected quite steeply, demonstrating a clear correlation with the Treasury curve.
However,
it remains uncertain whether Bitcoin would react the same way given
that it is not only considered a risk-on 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 declining since September 2020.
Thus,
there is a possibility that the inflation hedge aspect of Bitcoin
counters the rising Treasury curve. If so, BTC could remain unfazed,
particularly given the current strength of the bull run.
Misa
Christanto, an analyst at Messari, said that in a bear market,
everything is correlated. But Bitcoin, which is also considered a
"reflation trade," has been resilient. She wrote:
"US
Treasury curve is steepening. Why should we care? Because in a bear
market, everything is correlated. So far the headwinds have been on
equity returns, on unprofitable tech names. Reflation trades like $BTC
unaffected."
source link : https://cointelegraph.com/news/a-bitcoin-price-dip-for-ants-btc-quickly-rebounds-to-a-new-high-above-57k
