Analysis of the Reasons Behind Bitcoin Price Fluctuation

In the past week, the Bitcoin market has experienced significant price fluctuations. Multiple attempts to break through the resistance range of $24,200 to $24,300 have failed, and the market is showing a highly unstable condition. This short-term volatility is mainly influenced by several factors: chain liquidations, high funding rates, a slowdown in institutional capital inflows, and normal market adjustments.

Chain settlement and high funding rates lead to market decline

On December 20th, Bitcoin experienced a significant pullback at the $24,295 level. At that time, the exchange heat map showed a large number of sell orders above $24,000, leading the market to expect a pullback. In the next 17 hours, the price of Bitcoin fell to a low of $21,815, a drop of 10%. This plunge triggered a chain liquidation across major futures exchanges.

The standard leverage ratio in the futures market can reach up to 100 times, meaning that traders only need 1,000 USD to establish a position of 100,000 USD. A higher leverage ratio brings the liquidation price closer to the opening price, thereby increasing the risk of a large number of liquidations occurring in a short period.

On December 21, as the Bitcoin price fell below $22,000, hundreds of millions of dollars in long contracts were liquidated. Data shows that futures contracts worth $474 million were forcibly closed within 4 hours. This large-scale chain liquidation can trigger significant Fluctuation, as it forces traders to buy or sell large positions in a short amount of time.

An important indicator for assessing the bias of the futures market is the funding rate. Exchanges use the "funding fee" mechanism to balance the market. If there are too many market buyers, they need to compensate the sellers, and vice versa. Between December 20 and 21, the funding rate for Bitcoin once reached as high as 0.1%, which means that long positions had to pay high fees.

Institutional capital inflow slowdown may lead to a healthy correction

Analysts point out that if institutional capital inflows slow down, it may increase the risk of a Bitcoin correction. Throughout 2020, institutional investors have been the main driving force behind Bitcoin's rise. Data clearly shows that institutional interest in Bitcoin surged significantly in 2020.

When the largest buyer demand begins to weaken, the possibility of a deep adjustment will increase. This trend may trigger a chain liquidation and lead to a price drop, further exacerbating the decline of Bitcoin. However, some analysts have stated that even if this happens, the adjustment period for Bitcoin may be very brief.

An on-chain analyst pointed out that the risk of a pullback has increased due to whales selling Bitcoin on exchanges. However, he also stated that the price of the coin may quickly recover after the pullback, as buyer demand might offset the impact of the pullback.

From a macro perspective, a positive trend is that the outflow of funds from exchanges is decreasing, while the reserves of stablecoins on exchanges are increasing. This indicates that the number of active whales selling on exchanges may be decreasing, while some waiting funds are beginning to re-enter the cryptocurrency market.

Short-term Uncertain Factors

In the short term, one uncertain factor affecting the price trend of Bitcoin is the performance of a certain institutional investment tool. Data shows that the premium of this tool has reached 41%, which means that the Bitcoin purchased through this channel is 41% higher than the spot price.

The emergence of this high premium phenomenon is due to the fact that the United States has not yet approved the Bitcoin ETF, making this investment tool the preferred choice for many institutions and qualified investors. As long as the premium remains near historical highs, the risk of a sudden decrease in institutional demand for Bitcoin in the short term remains low. Considering that there are currently no obvious signs of a decline in the premium, the likelihood of a significant correction in Bitcoin due to reduced inflow of institutional funds remains small.