Is Bitcoin’s plunge to $3,000 a repeat of historical tragedy or a moderate pullback for bulls?

Source: FX168

Bitcoin plunged to its lowest level in 10 days on Thursday (November 26), putting the brakes on its sharp rise and triggering a sell-off in digital currencies. The intraday drop of 10.8% and the sharp correction of nearly $3,000 from the three-year high of $19,521 hit on Wednesday caught many investors off guard.

(Source: Coindesk)

Bitcoin’s 12-year history has seen both dizzying rises and equally dramatic falls. Its volatility has hampered its use for payments and made many larger investors cautious. Investors hope that a more mature market and fewer retail investors than in 2020 reduce the odds of a crash like the one that followed the 2017 bubble.

Traders said the liquidation of highly leveraged positions established when Bitcoin was near record levels, the CEO of major cryptocurrency exchange Coinbase expressing concerns on Twitter about rumors of a regulatory crackdown, and a technical pullback were reasons for the decline in Bitcoin prices.

1. Excessive leverage

Since 2017, a well-functioning cryptocurrency derivatives market has developed, with offshore exchanges offering highly leveraged positions. In times of illiquidity, volatility in such markets can have a huge impact on the price of Bitcoin.

"Bitcoin has become a victim of massive liquidation of leveraged derivatives trades listed on major exchanges," said Matthew Dibb, CEO of Stack Funds. "There has definitely been a sense of euphoria in the market over the past few days," said Joseph Edwards of crypto brokerage Enigma Securities. "A lot of this feels like a reaction to the crisis - the overleveraged market took a small hit and then it took a big hit."

Nearly $2 billion in derivatives positions were closed in the last 24 hours, and more than $1.6 billion in assets were closed in the last 12 hours, according to data source Bybit.

The unwinding of leveraged trades is expected as the cost of holding a long position in the perpetual futures market, also known as the funding rate, has risen sharply over the past few days to a multi-month high of 0.098% – a sign of an over-leveraged or overheated market. The funding rate is determined and paid every eight hours.

According to data source Glassnode, as prices fall, the funding rate has fallen back to 0.011%. In effect, excessive leverage has been squeezed out. Band Protocol CEO Soravis Srinawakoon said the sharp drop in crypto is healthy. "After Bitcoin was in the green for seven consecutive weeks, this is just a normal pullback because many people were over-leveraged."

(Source: Glassnode)

2. Rumors of increased regulation

Others expressed concern that market participants are speculating that the U.S. will increase regulation on individual investors storing cryptocurrencies.

Brian Armstrong, CEO of California-based Coinbase, said on Twitter on Tuesday that he was concerned about rumors that the United States would ban personal cryptocurrency wallets.

(Source: Twitter)

Bitcoin has reacted violently to regulatory crackdowns by U.S. authorities in the past. Last month, U.S. prosecutors filed criminal charges against four founders and executives of crypto derivatives exchange BitMEX, accusing them of evading rules designed to stop money laundering.

In addition, the announcement by the well-known cryptocurrency exchange OKEX that it would resume withdrawals may have also amplified the decline. "Most of the frozen Bitcoin (on OKEx) has risen by about 70%, so there are a lot of unrealized profits locked there," said Sui Chong, CEO of CF benchmark. "Once these coins are free to move, there will likely be many traders who will sell them in exchange for dollars and stablecoins to realize these gains, thereby increasing the momentum of the sell-off."

3. Technical retracement

“News that the Trump administration may restrict crypto could be a trigger for bitcoin’s decline,” said Antoni Trenchev, managing partner at Nexo in London, which calls itself the world’s largest digital currency lender. “But any asset that rebounds 75% in two months and 260% from its March lows is ripe for a correction.”

Bitcoin’s surge from $10,000 to $19,400 in the past seven weeks appears overextended on technical charts. Although the 14-day relative strength index (RSI) appears overbought, momentum has been so strong that the cryptocurrency has been trading above its 10-day moving average (MA) on the way up.

(Source: Coindesk)

Asset prices rarely make 90-degree rallies, as speculators tend to periodically lock in profits, pushing prices down to short-term moving averages. In previous bull runs, cryptocurrencies have seen several pullbacks of 20% or more.

"The price drop we saw today has taken the cryptocurrency well below its 10-day average and allowed the RSI to readjust to a more bullish tone," said Stack Funds' Dibb. "This is a healthy pullback." According to chart analysts, price rebounds from regular pullbacks are more sustainable than near-90-degree rises. Vijay Ayyar, head of business development at Singapore-based crypto exchange Luno, also said: "The market is extremely overbought and will see a pullback." "So I don't think this is unusual."

As Deribit Insights noted, some traders positioned themselves for a pullback by buying put options, or bearish bets.

The future is still bullish

But for Bitcoin, the path of least resistance is still to the upside. Trader and analyst Alex Kruger said, "The recent price decline is contrary to the larger bullish trend." In fact, despite the price decline, bullish macro factors such as rising institutional participation, record central bank money printing, and the search for yield remain intact.

Sentiment for holding Bitcoin remained strong on Thursday, with the number of bitcoins 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 bull market correction and remain confident in the cryptocurrency’s long-term prospects. The indicator has fallen by more than 17% this year, which means that liquidity in the market has declined.

(Source: Glassnode)

Today’s price plunge cleared out excess leverage. As the cost of holding a long position normalizes, Bitcoin can now stage a more sustained rally to record highs.

Crypto Broker's Heusser expects Bitcoin to consolidate between $17,500 and $19,000 in the short term before resuming its uptrend. "Bitcoin has not peaked yet," said Siddharth Menon, co-founder and COO of Mumbai-based WazirX exchange. "I also see a lot of professional traders taking long positions in Bitcoin. These positions are healthy because they are not going all in, but adding to their capital when the price goes up or down."