Bitcoin (BTC) fell to $ 53,905 on Binance overnight, posting a sharp drop of 6%. But despite the slight correction, Bitcoin price quickly recovered and reached a new permanent high above $ 57,800 on February 21.
Why did Bitcoin fall and recover so quickly?
Although Bitcoin fell sharply within hours, analysts indicated that it fell below the short-term trend line.
John Chow, Director of Global Expansion at Ground X, indicated that the drop was driven by replenishment of liquidity at a lower price.
Liquidity filling simply means that the asset is dropping after a recession to fill in buy orders at the lower end of the area.
The decline was expected as Bitcoin was consolidated with a future funding rate of around 0.15%.
On the major futures exchanges, the bitcoin futures financing rate ranged from 0.1% to 0.2% and was particularly high for stable currency 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 financing rate becomes positive. When this happens, buyers must pay a portion of the deal to sellers every eight hours.
When the funding ratio is high, but the bitcoin price holds, the risk of a major downfall increases in the short term.
This trend occurred on the night of February 20, when Bitcoin fell by more than 6%. Although the funding ratio remains close to 0.1%, it has decreased significantly since then.
The funding rate for the alternative digital currencies, including Ether (ETH) and DeFi tokens, is reset to 0.05%. Consequently, altcoins have rebounded further than BTC.
This is a serious risk for the foreseeable future.
In the short term, Bitcoin faces grave risks due to the rising curve of the US government. When the government curve rises, risky assets like stocks tend to decline.
Over the past week, the US stock market has corrected very sharply, indicating a clear correlation with the government curve.
However, it remains unclear whether Bitcoin will react in the same way, given that it is not only considered a risk to an asset, but is a hedge against inflation, which means it can counteract government curve risks.
Additionally, since September 2020, the correlation between Bitcoin and other assets, including stocks and gold, has decreased.
Bitcoin 90-day correlation against S & P500, Gold, VIX, US Dollar
Thus, there is a possibility that the hedging aspect of bitcoin inflation could counteract the government’s increasing curve. In this case, Bitcoin might remain the same, especially given the current strength of the bullish move.
In a bear market, Messa Cristanto, analyst at Messari, said everything is interconnected. But Bitcoin, which is also considered a “reversal trade,” has proven resilient. I wrote:
“The US Treasury curve is growing. Why should we care? Because in a bear market, everything is interconnected. So far, headwinds have been profitable for stocks and unprofitable tech names. Deflation works like $ BTC unchanged.”