The price of Bitcoin BTC dropped sharply from 37,800 to 35,000 overnight, liquidating 572 million worth of cryptocurrency futures positions. There are three major reasons why the price of Bitcoin declined steeply in the past 12 hours. The reasons are an overheated derivatives market, growing doubt in the market, and the lack of upside volatility. Before the pullback occurred, the Bitcoin derivatives market was extremely overheated. The futures funding rate was hovering at around 0.1, which is 10 times higher than the average 0.01.
The futures funding rate is a mechanism that achieves balance in the futures market by incentivizing long or short contract holders based on market sentiment. If there are more long contracts or buyers in the market, then the funding rate turns positive. If it becomes positive, then buyers have to compensate shortsellers with a portion of their contracts every eight hours, and vice versa.
Almost all major cryptocurrencies saw their funding rates spike to around 0.1 to 0.3, which meant the market was extremely overleveraged. When the market is this overcrowded, the likelihood of a long squeeze increases, which could cause many futures contracts to get liquidated in a short period. According to researchers at Santiment, there is trader doubt in the market on whether BTC would hit 40,00 again. They wrote
Thinking face There is an increasing amount of trader doubt that Bitcoin will revisit 40,000. But according to address activity and trade…