Bitcoin (BTC) has failed to hold onto gains over the past few weeks, giving back nearly all price increases shortly after they are made. According to crypto analyst and trader Daan Foppen, this phenomenon can be attributed to the outsized influence of futures markets on Bitcoin’s price action.

Foppen notes that Bitcoin’s spot market, where investors buy and sell actual BTC, has been mainly selling recently, as evidenced by the downtrend in spot market prices. In contrast, moves upward in Bitcoin’s price have been driven primarily by activity in 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 kinds of things are not sustainable for a market,” says Foppen. Whether stablecoin-margined or coin-margined, futures markets have been the driving force behind short-term price impulses in Bitcoin recently. However, the buying power used to move prices upward ultimately evaporates, leading to gains to be given back.

When futures dominate trading, the underlying spot market struggles to keep up. Price gains outpace actual buy demand for Bitcoin, leaving the market susceptible to abrupt reversals once futures buying power subsidies. This concept has been displayed clearly on Bitcoin price charts over the past month, with initial price spikes evaporating quickly.

Furthermore, according to Daan Foppen, recent volatility and price reversals in Bitcoin have been driven largely by leveraged trading and liquidations in futures markets. Foppen argues that the cryptocurrency’s price action over the past several weeks has been characterized by “impulsive moves” upward and downward that seem forceful but lack strength and sustainability.

For example, Bitcoin’s move to $27,400 on May 23 was mainly fueled by short liquidations, as overleveraged short positions were wiped out, creating a “snowball effect” upward. The subsequent sharp drop was similarly driven by the liquidation of long positions that had opened during the consolidation period with the expectation of higher prices.

BTC’s Increased Leveraged Positions

Moreover, Foppen points out that interest in Bitcoin futures has risen, indicating increased leveraged trading activity. However, it is difficult to determine whether new positions are predominantly short or long. Funding rates, which indicate whether longs or shorts are paying interest to balance the market, have been slightly positive recently but remain around the baseline.

Still, Foppen believes the ingredients are in place for “a deeper flush downwards” in Bitcoin’s price due to the likelihood that recently opened positions are mainly longs. “What you shouldn’t do now is blindly click the short button,” he warns. 

With highly leveraged and unstable dynamics currently driving Bitcoin’s price action, Foppen cautions that these are “very shaky conditions,” protecting one’s capital should be the top priority for traders. “What you should especially not do is let yourself get chopped up in this market,” he says. 

As of this writing, BTC is trading at $26,200, down over 3% in the last 24 hours. However, the largest cryptocurrency in the market may potentially stop its potential continuation of the downtrend at the 200-day Moving Average placed at $24,900, which may serve as a threshold for bulls. 

Featured image from iStock, chart from TradingView.com 

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Filed under: Bitcoin - @ May 24, 2023 9:20 pm