Bitcoin slumped early on Monday, soon after it had looked primed for a convincing move above $50,000.
The top cryptocurrency fell from nearly $49,000 to $45,926 during the early Asian hours and was last seen changing hands near $47,790 – down 1.8% on the day, according to CoinDesk 20 data.
The decline surprised many investors, as a notable all-time high milestone had looked on the cards amid optimism generated by the recent wave of institutional adoption.
So what happened? Here are three reasons that may explain the sudden price pullback.
1. Funding stress
“Bitcoin and other cryptocurrencies, in general, looked overheated, and the Asian session drop was likely a ‘funding reset’ needed for a sustained move above $50,000,” Matthew Dibb, COO and co-founder of Stack Funds, told CoinDesk
Indeed, the cost of holding long positions in bitcoin‘s perpetual futures market, also known as the funding rate, rose to a 12-month high of 0.109% on Sunday, indicating excess bullish leverage, or overheating, in the market.
The average funding rate began climbing at the end of January and surged to multi-month highs in the wake of Tesla’s disclosure of bitcoin investments last Monday. This suggests that the recent rally from below $40,000 was primarily driven by leverage on derivatives. As such, there was always the risk of funding reset.
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The price drop has liquidated over $300 million-worth of bitcoin long positions so far today, according to data source Coinalyze – that’s roughly 30% of the total long liquidations of $1.33 billion observed in the crypto market.
Many alternative cryptocurrencies such as XRP, XLM, LINK, ADA and some decentralized finance-linked tokens suffered double-digit price drops in the Asian session, overshadowing bitcoin’s 6% decline. According to Dibb, the wider sell-off added to bearish pressures around bitcoin.
According to a tweet from market analyst Josh Rager, the altcoin rally had turned “euphoric” last week, meaning a price drop was overdue.
2. Institutional demand weakened
The Coinbase premium indicator from analytics firm CryptoQuant turned negative on Sunday in a sign of weak demand from large investors.
The indicator measures the spread between Coinbase Pro’s BTC/USD pair and Binance’s BTC/USDT pair, which includes the USD-linked stablecoin tether. The indicator is widely followed by traders, as Coinbase Pro is considered synonymous with high net-worth individuals and institutional investors. A positive spread implies strong institutional inflows and vice versa.
“The premium fell nearly to -$80 during Sunday’s early European hours and remained largely neutral when the price was ranging between $48,000 to $49,000,” CryptoQuant CEO Ki-Young Ju told CoinDesk. “Weak spot inflows signaled scope for correction.”
Bitcoin’s rally from early October…