Analysis of the Reasons Behind Bitcoin Market Fluctuation

Recently, the price of Bitcoin has experienced significant fluctuations, with multiple attempts to break through the resistance level of $24,200 to $24,300 failing. This sharp volatility in the short term is mainly influenced by the following factors: consecutive liquidations, high funding rates, a slowdown in institutional capital inflows, and healthy market adjustments.

Continuous liquidations and high funding rates lead to price decline

On December 20, Bitcoin experienced a significant pullback on a trading platform, with the price starting to decline from $24,295. Due to the order book of the exchange showing a large number of sell orders above $24,000, the market generally anticipates an adjustment.

In the next 17 hours, the price of Bitcoin fell to a minimum of $21,815, a decrease of 10%. This sharp decline was mainly due to a series of liquidations on major futures trading platforms.

The futures market allows traders to use high leverage, with a standard leverage ratio of up to 100 times. This means that with just $1,000, one can establish a position of $100,000. The higher the leverage, the greater the liquidation risk, which can easily trigger large-scale liquidations in a short period of time.

On December 21, when the price of Bitcoin fell below $22,000, hundreds of millions of dollars in long contracts were forcibly liquidated. Data shows that approximately $474 million in futures contracts were liquidated within 4 hours.

This large-scale liquidation will trigger severe fluctuations, as it forces traders to buy or sell their positions at market price within a short period of time. On that day, many long position holders faced liquidation, further pushing the price of Bitcoin down.

The funding rate is an important indicator for assessing the bullish and bearish sentiment in the futures market. Exchanges use the "funding fee" mechanism to balance the market. When there are too many buyers, they need to pay compensation to sellers, and vice versa. A high funding rate indicates that the market is overly crowded with bulls.

From December 20 to 21, the funding rate for Bitcoin surged to a high of 0.1%. This means that traders holding a long position of $100,000 would need to pay about $300 in funding fees per day, putting immense pressure on traders.

The slowdown in institutional capital inflow may trigger a healthy adjustment

A certain large investment bank analyst pointed out that if institutional capital inflows slow down, it may increase the risk of Bitcoin corrections. Throughout 2020, institutional investors were the main driving force behind the rise of Bitcoin. Data shows that institutional interest in Bitcoin significantly increased in 2020.

When the maximum buyer demand begins to weaken, the likelihood of a deep adjustment will increase. This trend may trigger a chain liquidation, further exacerbating the price decline.

However, some on-chain analysts indicate that even if there is an adjustment due to a slowdown in institutional demand, its duration may be relatively short. Strong buying demand is expected to quickly offset the impact of the pullback.

From a macro perspective, a positive sign is that the outflow of Bitcoin from exchanges is decreasing, while the reserves of stablecoins are increasing. This indicates that active selling by large holders may be decreasing, while on-hold funds are re-entering the cryptocurrency market.

Investors tend to store the proceeds from selling cryptocurrencies as stablecoins, as it is more convenient to purchase other crypto assets with stablecoins. Therefore, an increase in the exchange's stablecoin reserves indicates that investors are reinvesting funds into major crypto assets like Bitcoin through stablecoins.

Short-term Uncertainty

In the short term, the movements of a certain large institutional investment tool remain an uncertain factor. Data shows that the premium of this tool has reached 41%, meaning that Bitcoin purchased through this channel is 41% higher than the spot price.

As the United States has not yet approved Bitcoin ETFs, this investment tool has become the preferred choice for many institutions and accredited investors. As long as its premium remains near historical highs, the risk of a sharp decline in institutional demand for Bitcoin in the short term is relatively low.

Given the current tool's premium shows no obvious signs of decline, the likelihood of a Bitcoin pullback due to reduced institutional capital inflow remains relatively low.