Why is every move up followed by a steep fall?

A burning bitcoin symbol. The End or Just the Beginning of Crypto?

Bitcoin (BTC) has not been able to hold onto its gains over the past few weeks, retracing almost all of its price increases shortly after they were executed. After According to crypto analyst and trader Daan Foppen, this phenomenon can be attributed to the outsized influence of the futures markets on the price development of Bitcoin.

Foppen points out that the bitcoin spot market, where investors buy and sell actual BTC, has been mostly selling lately, as evidenced by the downtrend in spot market prices. In contrast, the upward movements in Bitcoin price have been mainly driven by activity in the futures markets, where traders speculate on the future price of BTC using leverage.

Bitcoin’s downward spiral continues

“Most of the steps taken are made with borrowed money, and things like that are not sustainable for a market,” says Foppen. Whether stablecoin margin or coin margin: The futures markets have recently been the driving force behind short-term price impulses for Bitcoin. Eventually, however, the purchasing power that drove prices up dwindles and profits have to be repaid.

When futures dominate trading, the underlying spot market struggles to keep up. Price increases exceed actual buying demand for bitcoin, leaving the market vulnerable to abrupt reversals once futures purchasing power is subsidized. This concept has been clearly evident on bitcoin price charts over the past month, with the initial price spikes quickly fading.

Sell ​​BTC locally. Source: Dan Foppen Newsletter.

Furthermore, according to Daan Foppen, most of the recent volatility and price reversals in Bitcoin have been caused by leveraged trading and liquidations in the futures markets. Foppen argues that the cryptocurrency’s price action over the past few weeks has been characterized by “impulsive movements” up and down that appeared powerful but lacked strength and sustainability.

For example, Bitcoin’s rise to $27,400 on May 23 was primarily driven by short liquidations as over-leveraged short positions were wiped out, creating a “snowball” to the upside. The sharp drop that followed was also due to the unwinding of long positions opened during the consolidation phase in anticipation of higher prices.

BTC’s increased leveraged positions

Additionally, Foppen notes that interest in bitcoin futures has increased, indicating increased leveraged trading activity. However, it is difficult to determine whether new positions are predominantly short or long. Funding rates, which indicate whether long or short positions are paying interest to balance the market, have been slightly positive recently but are still close to the underlying.

Nonetheless, Foppen believes the conditions are in place for a “greater downtrend” in Bitcoin price given the likelihood that the positions opened recently are mostly long. “What you shouldn’t do now is blindly click the short button,” he warns.

Given the heavily leveraged and unstable momentum currently driving Bitcoin’s price action, Foppen warns that these are “very uncertain conditions” and protecting one’s capital should be a top priority for traders. “Under no circumstances should you allow yourself to be dismembered in this market,” he says.

As of this writing, BTC is trading at $26,200, down over 3% in the last 24 hours. However, the largest cryptocurrency in the market could possibly halt its potential downtrend continuation at the 200-day moving average of $24,900, which could serve as a barrier for bulls.

BTC’s downtrend on the 1-day chart. Source: BTCUSDT on TradingView.com

Selected image from iStock, chart from TradingView.com