Bitcoin (BTC) price fell to just $ 53,905 on Binance overnight, seeing a sudden 6% drop. Despite the minor correction, the price of Bitcoin recovered quickly thereafter, hitting a new all-time high above $ 57,800 on February 21.
Why did Bitcoin fall and recover so quickly?
Although Bitcoin saw a steep decline within a few hours, analysts found that it fell right to the bottom of a short-term trendline.
John Cho, Director of Global Expansion at Ground X, noted that the drop was a liquidity fill at a lower price.
$ BTC just needed a little liquidity, that’s all. https://t.co/XTeAYPROWz pic.twitter.com/zlkcBAAI4x
– John Cho (@JohnCho__) February 21, 2021
A liquidity fill simply means that after an asset has stagnated, it will fall to fulfill buy orders at the lower end of the range
A decline was expected as Bitcoin consolidated with a futures funding rate of around 0.15%.
On the most important futures exchanges, the Bitcoin futures financing rate moved between 0.1% and 0.2% and was particularly high for stable Bitcoin pairs.
Bitcoin futures exchanges use a mechanism called funding to motivate buyers or sellers based on market sentiment.
For example, if there are more buyers in the market, the financing rate will be positive. In this case, buyers will have to pay sellers part of their position every eight hours.
When the funding rate is high but the price of Bitcoin is consolidating, the risk of a large short-term decline increases.
This trend occurred overnight on February 20, when Bitcoin was down more than 6%. Although the funding rate remains near 0.1%, it has fallen significantly since then.
The funding rate for Altcoins, including Ether (ETH) and DeFi tokens, has been reset to around 0.05%. Altcoins therefore saw a stronger upswing than BTC.
There is a big risk in the foreseeable future
In the short term, Bitcoin is exposed to great risk due to the rising US Treasury curve. When the treasury curve rises in the past, risk-weighted assets like stocks tend to go down.
Over the past week, the US stock market has corrected quite sharply, showing a clear correlation with the Treasury curve.
However, it remains uncertain whether Bitcoin would react in the same way, as it is viewed not only as a risky asset but also as an inflation hedge, which means it could counter the risk of the Treasury curve.
Additionally, the correlation between Bitcoin and other assets, including stocks and gold, has been declining since September 2020.
Hence, there is a possibility that Bitcoin’s inflation-hedging aspect may counteract the rising Treasury curve. In that case, BTC could go unimpressed, especially given the current strength of the bull run.
Misa Christanto, an analyst at Messari, said everything is correlated in a bear market. Bitcoin, also known as “reflation trading,” however, has been resilient. She wrote:
“The US Treasury curve is steepening. Why should we care? Because everything is correlated in a bear market. So far, the headwinds have been due to stock returns and unprofitable tech names. Reflation businesses like BTC aren’t affected.”