3 key factors suggest Bitcoin is unlikely to see a major correction right now

Source/LongHash

Over the past week, the price of Bitcoin on Binance has risen from $10,530 to $11,491. After a strong short-term rebound, three key factors suggest that a sharp correction in the price of Bitcoin is unlikely.

Potential catalysts that could prevent a deeper pullback include positive on-chain indicators, positive technical structure on higher time frames, and trading activity trends.

What caused the slowdown in Bitcoin momentum from mid-September to early October?

In late September, Bitcoin's momentum weakened in tandem with the overall decline in the cryptocurrency market. In just five days from September 19 to September 23, the price of Bitcoin on Binance fell from $11,179 to $10,136. After a sharp drop of 9% in a short period of time, Bitcoin showed a continued slowdown until October.

A series of negative events between October 1 and 4 also further intensified the selling pressure on Bitcoin. On October 1, the U.S. Commodity Futures Trading Commission (CFTC) and the Department of Justice (DoJ) accused BitMEX of violating the Bank Secrecy Act. Within two hours of the Department of Justice’s public statement, the price of Bitcoin on Binance fell from about $10,900 to $10,500.

Then on October 2, U.S. President Donald Trump confirmed through social media that he had been infected with the coronavirus. President Trump's unexpected positive test result sent both crypto and stock markets into a state of turmoil.

On October 4, US President Trump abruptly interrupted talks on economic stimulus measures, claiming that discussions would be postponed until after the election. The US presidential election is expected to take place on November 3, which means that new stimulus measures are unlikely before the end of the year. The postponement of stimulus talks has further contributed to Bitcoin's weakness, causing its price to stagnate around $10,500.

However, despite a series of macro-negative events last week, Bitcoin has rebounded above $11,300 and stabilized in the $11,300 to $11,500 range. The resilience of Bitcoin prices, as well as positive fundamental and technical factors, greatly reduce the possibility of a significant price correction.

Supply and Bitcoin’s exchange reserves point to low selling pressure

Many on-chain indicators tell a similar story about Bitcoin’s performance in the fourth quarter: low selling pressure and high levels of HODLing. The term “HODLing” is often used within the crypto market to describe the act of holding Bitcoin for an extended period of time.

Since Bitcoin fell below $3,600 on BitMEX on March 13, the reserves of Bitcoin on exchanges have been reduced significantly. When traders and individual investors sell Bitcoin, they usually move the coins to exchanges. Therefore, when selling pressure increases, the reserves of Bitcoin on exchanges will increase as deposits grow.

The continuous decline in exchange reserves over the past seven months indicates that the selling pressure on Bitcoin is decreasing. Given the decreasing number of sellers and increasing demand, analysts describe this trend as a "seller crisis." Accordingly, the price of Bitcoin has rebounded strongly since March.

In the view of on-chain analyst Willy Woo, the decline in Bitcoin prices on spot exchanges is a very positive sign. The analyst emphasized that this trend shows that investors may be moving funds from exchanges to cold wallets to safely store BTC. Cold wallets refer to offline wallets that cannot be hacked because they are not connected to the Internet.

“When there are fewer coins on spot exchanges, it’s a signal that new buyers are entering the market to quickly accumulate Bitcoin and then transfer it to cold wallets to hold (HODL), and we are seeing new holders joining (HODLers). It’s very bullish on the macro level,” Woo said.

Woo further noted that this is one of the “few times” in his career that Bitcoin’s fundamentals have reached such high levels while the price has lagged behind them. The analyst compared the current situation to mid-2016, when the price of Bitcoin climbed from around $1,000 to $20,000 across all major exchanges in December 2017.

Data from Glassnode shows that the number of whales hoarding BTC has also grown rapidly during the same period. Whales are a term for individual investors who hold huge amounts of Bitcoin. According to Glassnode, addresses holding more than 1,000 BTC (equivalent to $1.14 million) are classified as whales.

Analysts at Glassnode said the rising trend in the number of whales suggests that high-net-worth investors expect Bitcoin to appreciate.

Positive technical structure on higher time frames

In addition to the positive fundamental data shown by on-chain indicators, Bitcoin’s technical structure on higher time frames also depicts a resilient uptrend. The price of Bitcoin remained above the $10,500 support level for most of August through October.

Technically, $10,500 is considered a support area as it marks the peak in July 2019. In technical analysis, when the price of an asset consolidates above its previous high, it is considered to be in a positive accumulation trend.

Traders often consider weekly and monthly candlestick charts as higher-level time frames. On the weekly chart, each candlestick represents a week's worth of trading volume. The past three weekly closes have all been above the $10,500 support level, indicating a positive technical structure.

Long-time futures trader Peter Brandt noted that the trend on the weekly chart is very encouraging. The trader also highlighted that Bitcoin’s enhanced rally coincided with a high-profile investment in Bitcoin by Square, the $81 billion payments group.

“This is a significant development that a global business now has BTC on its balance sheet. The weekly and daily charts are ready to give off a big buy signal,” Brandt said.

In a technical sense, due to the recent rally in Bitcoin, it is unlikely to drop sharply below the $10,500 support area, which has been acting as a strong support area for the past two months. The combination of optimistic on-chain indicators and favorable technical structure is likely to shift trader sentiment from cautious to neutral.

Trading activity trends are a positive variable

Data from Skew shows that open interest in the Bitcoin futures market remains relatively stagnant. In the spot market, institutional-facing platforms continue to see high volumes, including LMAX Digital and Bakkt.

When the futures market pulls the Bitcoin market and causes a surge in Bitcoin prices, the Bitcoin price is actually likely to experience a sharp correction. This is because trading in the futures market is highly leveraged, with traders borrowing capital to bet on the price trend of Bitcoin. Therefore, if there is a sharp change in the Bitcoin price, it will cause long or short contracts to be liquidated, further deepening the upward or downward trend.

However, total open interest in the Bitcoin futures market has remained in the range of $3.6 billion to $4.3 billion since September 14. Despite the expiration of CME futures contracts in the last week of September, there has been no significant increase in volume in the futures market since the beginning of October.

The combination of a stagnant futures market, a steadily growing spot market, and high volumes on institutional-facing platforms means that a large portion of buying demand comes from retail and institutional investors in the spot market. In theory, given that the spot market does not use leverage or borrowed funds, Bitcoin should see less volatility and a more stable upward trend in the coming months.