The price of Bitcoin (BTC) fell to $ 53,905 on Binance overnight, with a sudden 6% drop. But despite the minor correction, Bitcoin’s price recovered quickly thereafter, hitting a new all-time high above $ 57,800 on February 21.
Why did Bitcoin fall and recover so quickly?
While Bitcoin saw a sharp decline within hours, analysts found it to hit the bottom of a short-term trend line.
John Cho, the director of Global Expansion at Ground X, noted that the decline was a liquidity filling at a lower price.
$ BTC just needed some liquidity, that’s all. https://t.co/XTeAYPROWz pic.twitter.com/zlkcBAAI4x
– John Cho (@JohnCho__) February 21, 2021
A liquidity fill simply means when an asset falls after stagnation to fill buy orders at the bottom of the range
A decline was expected as Bitcoin was consolidating with a futures funding rate of around 0.15%.
On the major futures exchanges, the funding rate of Bitcoin futures has fluctuated between 0.1% and 0.2%, and it was especially high for stablecoin pairs.
Bitcoin futures exchanges use a mechanism called financing to incentivize buyers or sellers based on market sentiment.
For example, if there are more buyers on the market, the coverage ratio becomes positive. When that happens, buyers have to pay the sellers a portion of their position every eight hours.
When the funding rate is high, but the price of Bitcoin is consolidating, the risk of a major short-term decline increases.
This trend happened overnight on February 20, when Bitcoin fell by more than 6%. While the funding rate remains close to 0.1%, it has dropped significantly since then.
The funding rate for altcoins, including Ether (ETH) and DeFi tokens, was reset to around 0.05%. As such, altcoins saw a stronger bounce than BTC.
There is one big risk in the near future
In the short term, Bitcoin is at great risk due to the rising curve of the US Treasury. Historically, when the treasury curve rises, risk on assets such as stocks have tended to fall.
In the past week, the US stock market has corrected quite strongly, showing a clear correlation with the Treasury curve.
However, it remains uncertain whether Bitcoin would respond in the same way as it is considered not only a risk-on-asset but an inflation hedge, meaning it could counter the risk of the Treasury curve.
Additionally, the correlation between Bitcoin and other assets, including stocks and gold, has been declining since September 2020.
So there is a possibility that Bitcoin’s inflation hedge aspect is counteracting the rising Treasury curve. If so, BTC could go unaffected, especially given the current strength of the bull run.
Misa Christanto, an analyst at Messari, said that in a bear market everything is correlated. But Bitcoin, which is also considered a ‘reflation trade’, has been resilient. She wrote
“The US Treasury curve is getting steeper. Why should we care? Because in a bear market everything is correlated.