Bitcoinย (BTC) has failed to hold onto profits inย theย previous few weeks, giving back nearly all price increases shortly after they are made. According to cryptocurrency analyst and trader Daan Foppen, this phenomenon can be attributed to the outsized influence of futures markets on BTCโs price action.
Foppen pointsย out BTCโs spot market, where investors buy and sell actual BTC, has been mainly selling recently, as evidenced by the downtrend in spot market prices. Onย theย otherย sideย , moves upward in BTCโs price have been driven primarily by activity in futures markets, where traders speculate on the future price of Bitcoin using leverage.
Bitcoinโs Downward Spiral Continues
โThe moves that are made are mostly made with borrowed money, and these kinds of things are not sustainable for a market,โ reveals Foppen. Whether stablecoin-margined or coin-margined, futures markets have been the driving force behind short-term price impulses in Bitcoinย (BTC) recently. Nonetheless, the buying power used to move prices upward inย theย end evaporates, leading to profits to be given back.
Andย once futures dominate trading, the underlying spot market struggles to keep up. Price profits outpace actual buy demand for Bitcoin, leaving the market susceptible to abrupt reversals once futures buying power subsidies. This concept has been displayed clearly on Bitcoinย (BTC) price charts inย theย previous 30ย days, with initial price spikes evaporating quickly.
Furthermore, reportsย by Daan Foppen, recent volatility and price reversals in Bitcoinย (BTC) have been driven largely by leveraged trading and liquidations in futures markets. Foppen argues that the digitalย currencyโs price action inย theย previous plentyย of weeks has been characterized by โimpulsive movesโ upward and downward that seem forceful but lack strength and sustainability.
Forย instance, BTCโs move to $27,400 on May 23 was mainly fueled by short liquidations, as overleveraged short positions were wiped out, creating a โsnowball effectโ upward. The subsequent sharp fall was similarly driven by the liquidation of long positions that had opened during the consolidation period with the expectation of higher prices.
Bitcoinโs Increased Leveraged Positions
Furthermore, Foppen notesย that that interest in Bitcoinย (BTC) futures hasย beenย growing, indicating increased leveraged trading activity. Nonetheless, it is difficult to determine whether new positions are predominantly short or long. Financing prices, which indicate whether longs or shorts are paying interest to balance the market, have been slightly positive recently but remain around the baseline.
Still, Foppen believes the ingredients are in place for โa deeper flush downwardsโ in BTCโs price owingย to the likelihood that recently opened positions are mainly longs. โWhat you shouldnโt do now is blindly click the short button,โ he warns.ย
With highly leveraged and unstable dynamics asย ofย now driving BTCโs price action, Foppen cautions that these are โvery shaky conditions,โ protecting oneโs financialย resources should be the top priority for traders. โWhat you should especially not do is let yourself get chopped up in this market,โ he says.ย
As of this writing, Bitcoin is currentlyย worth $26,200, down over 3 percent in theย previousย day. Nonetheless, the largest digitalย currency in the market may potentially stop itsย probability toย continue of the downtrend at the 200-day Moving Average placed at $24,900, whichย canย potentially serve as a threshold for bulls.ย
Featured image from iStock, chart from TradingView.comย
