Bitcoin (BTC) has failed to hold onto gains in recent weeks, giving back almost all price increases shortly after they are made. According For crypto analyst and trader Daan Foppen, this phenomenon can be attributed to the huge influence of futures markets on Bitcoin price action.
Foppen points out that the Bitcoin spot market, where investors buy and sell real BTC, has been mostly selling off recently, as evidenced by the downward trend in spot market prices. On the contrary, the bullish movements in the price of Bitcoin have been mainly driven by activity in the futures markets, where traders speculate on the future price of BTC using leverage.
Bitcoin’s downward spiral continues
“The moves that are made are mostly made with borrowed money, and these types of things are not sustainable for a market,” says Foppen. Whether stablecoin-margined or coin-margined, the futures markets have been the driving force behind short-term price impulses in Bitcoin recently. However, the purchasing power used to push prices up eventually evaporates, leading to profits being paid back.
When futures dominate trading, the underlying spot market struggles to keep up. Price gains outpace actual buying demand for Bitcoin, leaving the market susceptible to sharp reversals once futures subsidize purchasing power. This concept has been clearly displayed on the Bitcoin price charts over the past month, with initial price spikes evaporating quickly.
BTC spot sale. Source: Dan Foppen Newsletter.
Furthermore, according to Daan Foppen, recent volatility and price reversals in Bitcoin have been largely driven by leveraged trading and liquidations in the futures markets. Foppen argues that cryptocurrency price action in recent weeks has been characterized by “impulsive moves” up and down that appear forceful but lack strength and sustainability.
For example, Bitcoin’s move to $27,400 on May 23 was mainly driven by short liquidations, as overleveraged short positions were wiped out, creating an upward “snowball effect”. The subsequent sharp decline was similarly driven by the liquidation of long positions that had been opened during the consolidation period on the expectation of higher prices.
Increase in leveraged BTC positions
Additionally, Foppen notes that interest in Bitcoin futures has increased, indicating increased leveraged trading activity. However, it is difficult to determine if the new positions are predominantly short or long. Funding rates, which indicate whether long or short positions are paying interest to clear the market, have been slightly positive recently, but remain around the benchmark level.
Still, Foppen believes the ingredients are ready for “a deeper decline” in the price of Bitcoin due to the likelihood that recently opened positions are mostly long. “What you don’t want to do now is blindly click the short button,” he warns.
With highly leveraged and unstable dynamics currently driving Bitcoin price action, Foppen cautions that these are “very unstable conditions” so protecting one’s capital should be top priority for traders. “What you especially shouldn’t do is let yourself be cut off in this market,” he says.
As of this writing, BTC is trading at $26,200, down more than 3% in the last 24 hours. However, the largest cryptocurrency on the market can potentially stop its potential downtrend continuation at the 200-day moving average located at $24,900, which may serve as a threshold for the bulls.
BTC downtrend on the 1-day chart. Source: BTCUSDT on TradingView.com
Featured Image from iStock, Chart from TradingView.com
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