A Bitcoin price dip for ants? BTC quickly rebounds to a new high above $57K
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.
BTC/USDT 4-hour price chart (Binance). Source: TradingView.com
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.
$BTC just needed a little liquidity that’s all. https://t.co/XTeAYPROWz pic.twitter.com/zlkcBAAI4x
— John Cho (@JohnCho__) February 21, 2021
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.
Bitcoin rolling 90-day correlation vs. S&P500, Gold, VIX, USD
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.”
The price of Bitcoin (BTC) fell to $53,905 on Binance overnight, with a sudden drop of 6%. But despite the minor correction, the price of Bitcoin recovered soon after, reaching a new all-time high above $57,800 on February 21.
Table of prices over 4 hours of BTC/USDT (Binance). Source: TradingView.com
Why did Bitcoin fall and recover so quickly?
Although Bitcoin experienced a sharp decline in just a few hours, analysts noted that it fell to the bottom of a short-term trend line.
John Cho, Ground X’s director of global expansion, said the drop was a replenishment of cash at a lower price.
$BTC just needed some money, that’s all. https://t.co/XTeAYPROWz pic.twitter.com/zlkcBAAI4x
– John Cho (@JohnCho__) February 21, 2021
Liquidity surplus simply means that an asset is falling after being stagnant to meet buying orders at the bottom of the supply.
A decline was expected as Bitcoin consolidated with a forward funding rate of about 0.15%.
On the major futures exchanges, the funding rate for Bitcoin futures was between 0.1% and 0.2% and was particularly high for the stable currency pair.
Bitcoin’s futures markets use a mechanism called “financing” to induce buyers or sellers based on market sentiment.
For example, when more buyers enter the market, the financing rate becomes positive. When this happens, buyers must pay sellers a portion of their position every eight hours.
If the funding rate is high, but the price of bitcoin is consolidating, the risk of a sharp drop in the short term increases.
This trend occurred on the night of February 20, when Bitcoin fell by more than 6%. The support rate is still at 0.1%, but it has fallen significantly since then.
The funding rate for altcoins, including Ether (ETH) and DeFi tokens, was reset to about 0.05%. Thus, the altcoins received a stronger boost than BTC.
There is a major risk for the near future
Bitcoin is at higher risk in the short term due to the rise in the yield curve of U.S. Treasuries. When the Treasury yield curve rises, historically risky assets like stocks fall.
The U.S. stock market underwent a fairly sharp correction last week and showed a clear correlation with the Treasury yield curve.
However, it is not certain that Bitcoin will react in the same way, as it is considered not only a risky asset but also an inflation hedge, meaning that it can counteract the risk of the Treasury curve.
In addition, the ratio of bitcoin to other assets, including stocks and gold, has been declining since September 2020.
90-day correlation of Bitcoin with S&P500, gold, VIX, USD
It is therefore possible that Bitcoin’s inflation hedging aspect could offset the rise in the Treasury yield curve. If this is the case, BTC may not be impressed, especially given the current strength of the rise.
Misa Christanto, analyst at Messari, said everything is interrelated in a bear market. But Bitcoin, which is also considered a “reflation trade,” held up well. She wrote:
“The U.S. government bond curve is turning.” Who cares? Because in a falling market, everything is connected. Stock market gains, unprofitable technical names still come to mind. Refinancing transactions like the $BTC are not affected by this.”