Bitcoin (BTC) has not been able to hold onto its gains over the past few weeks as the price surge has almost exclusively occurred shortly after it was formed. According to crypto analyst and trader Dan Fopen, this phenomenon is due to the great influence of the futures markets on the price development of Bitcoin.
Fopen noted that the bitcoin spot market, where investors buy and sell actual BTC, has been mostly selling lately, evidenced by a drop in spot market prices. In contrast, the surge in Bitcoin price is primarily due to activity in the futures markets, where traders use leverage to speculate on the future price of BTC.
Bitcoin’s downward spiral continues
“Most of the steps that are being taken are being done with borrowed money, and things like that are not sustainable for the market,” says Fopen. Be it stablecoin margin or coin margin, the futures markets have been the driving force behind short-term price impulses in bitcoin of late. However, the purchasing power that drove prices up eventually dwindles, allowing profits to be returned.
When futures dominate trading, the underlying spot market struggles to keep up. The price increases far exceed the actual buying demand for Bitcoin, leaving the market vulnerable to sudden reversals after buying electricity subsidies in the future. This concept has been clearly showcased on Bitcoin price charts over the past month, with early price gains quickly evaporating.
Spot selling BTC. Source: Dan Fopen Newsletter,
Furthermore, according to Dan Fopen, most of the recent volatility and price reversal in Bitcoin is due to 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 ups and downs” that appeared bullish but lacked strength and stability.
For example, Bitcoin’s surge to $27,400 on May 23 was primarily due to short liquidations as over-leveraged short positions were wiped out, creating a “snowball” effect to the upside. The sharp decline that followed was due to the unwinding of equal length positions opened during the consolidation phase in anticipation of higher prices.
Increased leverage of BTC
Additionally, Foppen noted that interest in bitcoin futures has increased, indicating an increase in leveraged trading activity. However, it is difficult to determine whether the new positions are predominantly short or long. Funding rates, which indicate whether long or short rates are paying off to balance the market, have turned slightly positive recently but are still close to the underlying.
Still, Foppen believes the conditions are in place for a “deeper drop” in Bitcoin price, likely due to the fact that recent open positions are overwhelmingly long. “What you shouldn’t do now is blindly click little buttons,” he warns.
Given the extreme leverage and volatile momentum currently seen in bitcoin prices, Fopen warns that these are “very volatile conditions” and protecting one’s capital should be a top priority for traders. “You shouldn’t isolate yourself in this market in particular,” he says.
As of this writing, BTC is trading at $26,200, down more than 3% over the past 24 hours. However, the largest cryptocurrency on the market is likely to break its possible downtrend continuation at the 200-day EMA of $24,900, which could serve as a limit for the bulls.
BTC is trending down on the 1-day chart. Source: BTCUSDT on TradingView.com
Selected image from iStock, chart from TradingView.com
Source: www.newsbtc.com
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