Bitcoin’s latest price drop has a silver lining – it has forced out weak hands in the derivatives market and potentially opened the doors for a more sustainable rally to recent highs.
- The top cryptocurrency by market value fell by over 3.5% to levels near $11,100 on Tuesday, according to CoinDesk’s Bitcoin Price Index.
- The price drop triggered sell liquidations, the forced unwinding of long trades, worth nearly $50 million in perpetuals (futures with no expiry) listed on cryptocurrency exchange BitMEX, according to data source Skew.
- “The positives of last night's move was that it cleared out a lot of the weak leverage longs,” Singapore-based QCP Capital said in a Telegram post, in reference to the perpetuals liquidations.
- “Weak longs” is the term used to describe traders lacking confidence or resources to hold assets for the long haul. Usually, it’s the retail crowd that exits the market or is forced out on minor price dumps or pumps.
- Markets often shake out weak hands with temporary price pullbacks following strong breakouts like bitcoin’s recent move above $12,000.
- Following Tuesday’s price drop, the cost of holding long positions in BitMEX perpetuals, as represented by the “funding rate,” has normalized.
- Funding rate is a mechanism used to tether a perpetual contract's price to the spot price.
- A high funding rate discourages new investors from entering the market and existing holders from boosting their long positions.
- “The unsustainably high funding rate has been pushed back to its typical baseline levels of 11% annualized,” QCP Capital said.
- The funding rate had jumped to highs above 60% in annualized terms on Aug. 18, when bitcoin broke above $12,000.
- As a result, stronger buying pressure may emerge, leading to a re-test of recent highs above $12,000.
- Bitcoin is currently trading near $11,400.
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