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Is excessive bullish optimism behind Bitcoin’s drop below $60K?

Is excessive bullish optimism behind Bitcoin’s drop below $60K?

With the price of BTC holding steady at about $64,000 today, some might be feeling a little bit more cautious. But can we still call this a “bear market”?

Bitcoin has been on a rollercoaster ride the past few weeks, with a drop below $60K causing some to ask why. There is evidence that excessive bullish optimism may be behind Bitcoin’s drop. Read more in detail here: why did bitcoin spike.

When market-anticipated events occur, Bitcoin (BTC) has a lengthy history of creating local peaks. The recent debut of a Bitcoin exchange-traded fund (ETF) on Oct. 19 was no exception, with the cryptocurrency rallying 53 percent in a month to an all-time high of $67,000.

Investors are trying to figure out if the 10% drop was healthy short-term profit taking or the end of the bull run now that the price has momentarily gone below $60,000. Traders may figure this out by looking at BTC’s recent price action and comparing it to other currencies.

Is excessive bullish optimism behind Bitcoin’s drop below $60K?The price of bitcoin in US dollars. TradingView is the source of this information.

The graph above represents the day in November 2013 when the New York Times reported that “Bitcoin receives cautious okay from China’s central bank.” People might freely engage in the Bitcoin market, according to Yi Gang, deputy governor of the People’s Bank of China (POBC). He also stated a personal viewpoint on digital money that he believes is beneficial in the long run.

It’s also worth noting that this positive media coverage on Chinese state-run television aired on Oct. 28, and it included the world’s first Bitcoin ATM, which was located in Vancouver.

Bearish occurrences are also possible.

Throughout Bitcoin’s 12-year price history, bearish evidence may be identified. The Chinese ban in April 2014, for example, represented a 5-month low in pricing.

Is excessive bullish optimism behind Bitcoin’s drop below $60K?The price of bitcoin in US dollars. TradingView is the source of this information.

Huobi and BTC Trade, two of China’s major exchanges, said on April 10, 2014 that their trading accounts with certain domestic banks will be suspended within one week. Rumors have been swirling since March 2014, spurred by a letter published by the Chinese news source Caixin.

The debut of CBOE Bitcoin futures on December 19, 2017, one day before the notorious $20,000 all-time high, was a more recent occurrence. The Coinbase IPO on Nasdaq, when Bitcoin hit $64,900, was another event that marked a local high. On the graph below, both events are indicated:

Is excessive bullish optimism behind Bitcoin’s drop below $60K?In USD, the price of bitcoin at Coinbase. TradingView is the source of this information.

Take note of how all of the events listed above were widely expected, even though some did not have a specific announcement date. For example, the SEC’s Chair Gary Gensler’s comment on Aug. 3 that the agency would be open to considering a BTC ETF application utilizing CME derivatives instruments preceding Bitcoin’s futures-based ETF’s maiden trading session on Oct. 19.

It’s likely that investors were already positioning themselves ahead of the debut of the ProShares Bitcoin Strategy ETF, and a study into BTC’s derivatives markets might shed additional light on this.

The premium on futures was not “exaggerated.”

The basis rate, often known as the futures premium, is a metric that reflects the price difference between futures contract prices and spot market prices. Whales and arbitrage desks like quarterly futures as a tool. Although the absence of a shifting funding rate may seem to be a disadvantage for retail traders owing to their settlement date and price difference from spot markets, the lack of a dynamic funding rate is their most important benefit.

After the bais rate hit 17 percent, the highest level in 5 months, several experts predicted a “return of the contango.”

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@DylanLeClair_ — Dylan LeClair (@DylanLeClair_) 20th of October, 2021

In a typical case, any futures market (soy, S&P 500, WTIl) will trade at a somewhat higher price than the spot market. This is due to the fact that the investor must wait until the contract expires to get his reward, resulting in an opportunity cost, which produces the premium.

Is excessive bullish optimism behind Bitcoin’s drop below $60K?Annualized premium on Bitcoin 3-month futures. laevitas.ch is the source of this information.

Assume that one engages in arbitrage transactions in order to maximize the amount of money kept in USD. Using decentralized financing (DeFi) or centralized crypto lending platforms, this trader may acquire a stablecoin and earn a 12 percent yearly income. For a market maker, a 12% premium on the Bitcoin futures market should be considered ‘neutral.’

After a 50 percent month-to-date rise, the basis rate remained below 17 percent, excluding the short-lived 20 percent high on Oct. 21. In contrast, the futures premium on the eve of Coinbase’s stock offering soared to 49 percent. As a result, those who characterize the present situation as too hopeful are just mistaken.

Risks of liquidation were likewise not “imminent.”

A 10% to 15% price decline might spark cascade liquidations if purchasers are overconfident and pay a high premium for leverage via futures contracts. However, the existence of a 40% annualized premium or greater does not always imply that a collapse is impending, since purchasers might add margin to keep their positions open.

As the key derivatives statistic illustrates, a 10% decrease from the all-time high of $67,000 on Oct. 20 did not create any concern among professional traders, as the basis rate remained at a healthy 12 percent.

The author’s thoughts and opinions are purely his or her own and do not necessarily represent those of Cointelegraph. Every investing and trading decision has some level of risk. When making a choice, you should do your own research.

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