Bitcoin's prices have surrendered much of 2021's eye-popping gains in an equally breathtaking plunge, a drop traders and analysts said was mostly due to short-term profit-taking by some institutional investors.
- Bitcoin fell to as low $30,305.30, just over $1,100 from its 2020 closing price of $29,133.86, before recovering to $32,748.52 at press time, down 14.51% in the last 24 hours.
- The price for the oldest cryptocurrency is down 21.8% from its all-time high at $41,962.36, which was reached in the past week.
- Darius Sit of crypto quant trading firm QCP Capital told CoinDesk the sharp price drop was likely driven by hedge funds taking short-term profits after bitcoin's price soared quickly at the start of the year.
- Sit cited the bitcoin price gap between the Chicago Mercantile Exchange, which mainly serves institutional investors, and other exchanges as evidence that traditional money managers could be taking some short-term profit from bitcoin's recent all-time high price.
- Bitcoin futures on CME are traded between Sunday and Friday, according to CME's website. When the market closed on Friday, Jan 8., data from TradingView showed bitcoin's price on CME was at $39,520.
- The CME has become the largest bitcoin futures exchange by number of open contracts because institutional interest in bitcoin continues to grow, as CoinDesk reported in December.
- "This market move appears to be investors taking positions that mean they can trade on short-term momentum changes," Sui Chung, chief executive of CF Benchmarks, told CoinDesk. "The retail-driven spot market, which was pretty much the entire market three years ago, is now part of a much more mature and diverse marketplace that includes derivatives, investment funds and other institutional involvement."
- A key level to watch, according to Guy Hirsch, managing director for eToro USA, is $20,000, a level where many institutions bought bitcoin and pushed the price above $30,000 during December.
- "If we stay above $20,000, we are likely to experience the same types of rapid recoveries that we have seen in the past," Hirsch said. "If we fall past $20,000, which appears to be unlikely because of the amount of institutional buying at that level, it’s anyone’s guess how far we fall. But we do feel this scenario is unlikely."
- Others said the bitcoin options market is another driver of the price volatility.
- There is a great number of open options interest at the $36,000 and the $52,000 levels, respectively, according to data from Skew.
- The fact that bitcoin was trading at such high levels was not normal to begin with and was, in part, a "byproduct of [a] gamma squeeze," Denis Vinokourov, head of research at the London-based prime brokerage Bequant, said. "That said, it is still possible that the market will be witness to another gamma squeeze at $52,000."
- "Since there is a good deal of open options interest at the $52,000 price level, we could see a recovery quicker than many expect," Vinokourov added.