Bitcoin (BTC) has failed to hold onto profits in the 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 BTC’s price action.
Foppen points out BTC’s spot market, where investors buy and sell actual BTC, has been mainly selling recently, as evidenced by the downtrend in spot market prices. On the other side , moves upward in BTC’s price have been driven primarily by activity in futures markets, where traders speculate on the future price of Bitcoin using leverage.
Bitcoin’s Downward Spiral Continues
“The moves that are made are mostly made with borrowed money, and these kinds of things are not sustainable for a market,” reveals Foppen. Whether stablecoin-margined or coin-margined, futures markets have been the driving force behind short-term price impulses in Bitcoin (BTC) recently. Nonetheless, the buying power used to move prices upward in the end evaporates, leading to profits to be given back.
And 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 Bitcoin (BTC) price charts in the previous 30 days, with initial price spikes evaporating quickly.
Furthermore, reports by Daan Foppen, recent volatility and price reversals in Bitcoin (BTC) have been driven largely by leveraged trading and liquidations in futures markets. Foppen argues that the digital currency’s price action in the previous plenty of weeks has been characterized by “impulsive moves” upward and downward that seem forceful but lack strength and sustainability.
For instance, BTC’s move to $27,400 on May 23 was mainly fueled by short liquidations, as overleveraged short positions were wiped out, creating a “snowball effect” 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.
Bitcoin’s Increased Leveraged Positions
Furthermore, Foppen notes that that interest in Bitcoin (BTC) futures has been 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 “a deeper flush downwards” in BTC’s price owing to the likelihood that recently opened positions are mainly longs. “What you shouldn’t do now is blindly click the short button,” he warns.
With highly leveraged and unstable dynamics as of now driving BTC’s price action, Foppen cautions that these are “very shaky conditions,” protecting one’s financial resources should be the top priority for traders. “What you should especially not do is let yourself get chopped up in this market,” he says.
As of this writing, Bitcoin is currently worth $26,200, down over 3 percent in the previous day. Nonetheless, the largest digital currency in the market may potentially stop its probability to continue of the downtrend at the 200-day Moving Average placed at $24,900, which can potentially serve as a threshold for bulls.
Featured image from iStock, chart from TradingView.com