The three reasons why Bitcoin contracted by 7.4% overnight

The three reasons why Bitcoin contracted by 7.4% overnight

In the last 12 hours, Bitcoin’s price has fallen sharply from $37,800 to $35,000: what are the reasons for this sudden pullback?

Tonight the price of Bitcoin (BTC) fell sharply from $37,800 to $35,000, leading to the liquidation of futures positions worth as much as $572 million.

There are three main reasons why BTC has contracted so sharply in the last 12 hours: an overheated Crypto Trader derivatives market, growing doubts about future cryptocurrency movements and a lack of bullish volatility.

The derivatives market was heavily overheated

Before the pullback occurred, the Bitcoin derivatives market was extremely overheated. The funding rate for futures was hovering around 0.1%, a figure ten times higher than the average of 0.01%.

The funding rate is a mechanism to achieve equilibrium in the futures markets by incentivising the opening of long or short contracts based on market sentiment.

If there are more long contracts than short contracts in the market, the funding rate becomes positive, forcing buyers to compensate short-sellers with a portion of their contracts every eight hours, and vice versa.

Almost all major cryptocurrencies saw an increase in the funding rate, which reached peaks of between 0.1 and 0.3 per cent: in other words, the whole market was extremely overheated.

When this happens, the probability of a long squeeze becomes very high, causing a large number of contacts to be liquidated in a short period of time.

Growing uncertainty in the market

According to researchers at Santiment, traders are beginning to wonder if Bitcoin will ever return to $40,000:

„There is a growing amount of doubt among traders as to whether Bitcoin will revisit $40,000. But taking a look at address activity and trading volumes, the long-term trend still looks very healthy.“

Bitcoin’s network fundamentals, such as address activity and trading volumes, remain strong. However, it is undeniable that market sentiment has weakened over the past week as the price struggles to break through resistance at $38,000.

Buyer interest is waning

For the past few days, we have seen little buyer interest in the Bitcoin market, especially compared to the rally at the beginning of the month which pushed the price to $42,000.

During the early stages of the rally, when Bitcoin slipped to a key support level such as $35,000, there was an immediate reaction from buyers. However, from the second half of January onwards, the response from buyers has been weaker, indicating that expectations of a rally towards the $40,000 to $42,000 resistance area have diminished, at least in the short term.

In the first two weeks of January, selling pressure came mainly from Asia. However, as indicated by tonight’s correction, Bitcoin is also starting to show weakness in the US market.

The low bullish volatility has made traders more cautious in the short term: this means that BTC will most likely see a prolonged consolidation phase until February.