Analysis of Multiple Factors Behind Bitcoin Price Fluctuation

In the past week, Bitcoin price experienced significant fluctuations, attempting multiple times to break through the resistance level of $24,200 to $24,300 without success. This short-term dramatic price fluctuation was influenced by several factors, mainly including chain liquidations, high funding rates, a slowdown in institutional capital inflows, and natural market adjustments.

Chain liquidation and high funding rates lead to market decline

On December 20th, Bitcoin experienced a significant correction at the price of $24,295. At that time, the exchange heatmap showed a large number of sell orders above $24,000, indicating that a correction was imminent. In the following 17 hours, the price of Bitcoin fell to a low of $21,815, a decrease of 10%. This was due to the chain liquidation effect within the major futures exchanges.

In the futures market, traders often use high leverage for large transactions. For example, the standard leverage ratio in the Bitcoin futures market can reach up to 100 times, meaning that with $1,000, a position of $100,000 can be established. The higher the leverage, the greater the liquidation risk. On December 21, as the price of Bitcoin fell below $22,000, hundreds of millions of dollars in long contracts were forced to liquidate. Data shows that approximately $474 million in futures contracts were liquidated within 4 hours.

Mass liquidation will trigger severe fluctuations as it forces traders to close positions rapidly in a short period of time. In this event, a large number of long contract holders were forced to sell, exacerbating the downward trend in Bitcoin prices.

The key indicator for assessing the bullish and bearish sentiment in the futures market is the funding rate. When there are too many buyers, the funding rate rises. From December 20 to 21, the funding rate for Bitcoin once surged to 0.1%, which imposed significant cost pressure on position traders.

Institutional capital inflow slowdown may trigger a healthy adjustment

A large investment bank analyst pointed out in a report that if institutional fund inflows slow down, it may increase the risk of Bitcoin retracement. Throughout 2020, institutional investors have been the main force driving Bitcoin's rise. When the demand from the largest buyers starts to weaken, the likelihood of a deep adjustment will increase.

However, a certain on-chain analyst stated that even in this case, the adjustment period for Bitcoin may be very short. He pointed out that although the risk of a pullback has increased due to large holders selling Bitcoin on exchanges, the price may quickly recover after the pullback because strong buying demand can 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 are increasing. This indicates that active selling by large holders may be decreasing, while cautious funds are starting to re-enter the cryptocurrency market. Investors tend to store the proceeds from selling cryptocurrencies as stablecoins to facilitate subsequent purchases of other crypto assets. Therefore, the increase in stablecoin reserves on exchanges means that investors are reinjecting funds into major crypto assets like Bitcoin through stablecoins.

Short-term Uncertainties

In the short term, the movements of a certain Bitcoin trust fund remain an uncertain factor. Data shows that the fund's premium has reached 41%, meaning that Bitcoin purchased through this avenue is 41% higher than the spot price. This high premium phenomenon is mainly due to the fact that the United States has not yet approved a Bitcoin ETF, making this trust fund the preferred tool for many institutions and qualified investors.

As long as the premium of the trust fund remains near historical highs, the risk of a sharp decline in institutional demand for Bitcoin in the short term is relatively low. Considering that there are currently no significant signs of a decline in the premium, the possibility of a substantial correction in Bitcoin due to a decrease in institutional capital inflow is still low.