Reasons for Bitcoin’s Price Drop and Why it Wasn’t Surprising

After Bitcoin’s price had achieved a new 2020 high when it hit $12,486 on Coinbase, the cryptocurrency’s price pulled back. In the last 48 hours, the pioneer cryptocurrency’s price fell by 5%, which lead to larger losses in the altcoin market. There are three major reasons why Bitcoin was unable to maintain the $12.4k level, which are namely high funding rates, major resistance and an overheated rally. However, traders believe that this pullback was a healthy one and this could end up strengthening the momentum of Bitcoin.

Is a Correction of $1,000 Healthy?

If you have seen previous Bitcoin price cycles, it is easy to see that the digital asset usually experiences a quick upsurge in price, which is then followed by a sharp correction. For instance, Bitcoin’s price had risen from $7,400 to as high as $10,500 from January to February of this year. In the next month, the cryptocurrency’s price had declined once again to pre-January levels. There are also huge spikes in volatility in Bitcoin price due to the futures market. When there is a large drop or upsurge in Bitcoin, it leads to a cascade of liquidations, which results in bigger price movements.

In the last 48 hours, the minor pullback has allowed funding rates to be neutralized, which means that long contracts are no longer overcrowding the futures market and it has flushed out overleveraged positions. According to some traders, this was a healthy pullback and this may temporarily lead to a period of consolidation or stabilization. Some traders even said that they wouldn’t be surprised if Bitcoin starts trading sideways between $12,200 and $11,200. Likewise, some other traders were also of the opinion that the cryptocurrency was showing indications of a previous fractal that had occurred in May, 2019.

At that time, there had been two minor corrections experienced by Bitcoin and there had been several weeks of consolidation before the crypto rallied to a new high. Historical fractals often play out where Bitcoin is concerned because the market often moves in a cycle in the short term and also in the long term. After Bitcoin has undergone a major rally, the price of the cryptocurrency tends to consolidate, particularly before it enters a key resistance range that falls between $12,000 and $14,000.

Declining Selling Pressure

Throughout the Bitcoin bull trend, there has been a consistent theme since June that of selling pressure declining across the market. According to the Glassnode’s on-chain analysts, the Bitcoin reserves are significantly lower than the previous top that had been seen in July, 2019. The fall in the Bitcoin exchange balances is indicative of a reduction in selling pressure. Currently, there is 2.6 million BTC that’s held on exchanges. This is lower than when Bitcoin hit a local top last year when they were 2.8 million. It is even lower than the sell-off in March, when they had been 2.7 million.

The declining exchange reserves, historical fractals indicating similar price action and the confluence of a neutral futures market all support the Bitcoin bull case.