In a recent analysis, cryptocurrency analytics firm CryptoQuant shed light on the sudden decline in the cryptocurrency market using five critical charts.
Bitcoin price fell 10.8% from $65,062 to $58,053, while Ethereum saw a sharper 14.5% drop from $2,792 to $2,384. These charts provide insight into what’s driving the recent market movements.
Short-Term Holders Create Resistance at Breakeven Price
Bitcoin’s price has been under pressure, particularly from short-term holders who have recently seen their holdings revert to cost-averaging. Earlier this month, a significant drop left short-term holders with losses of 17%. As prices returned to breakeven, many chose to sell, creating resistance that added to the downward pressure.
High Price Speculation Creates Fragile Environment
The market has become highly speculative as traders speculate on further price increases. Open Interest, a measure of the number of outstanding derivatives contracts, has increased 31% since August 5, from $13.5 billion to $17.9 billion. Positive funding rates have reflected bullish traders’ sentiment, indicating a premium on perpetual contracts. However, this speculative behavior has contributed to market instability, making positions vulnerable to sharp corrections.
Spot Inflows Rising Amid Falling Prices
Despite the price drop, there has been a significant increase in Bitcoin inflows to spot exchanges, indicating potential selling pressure. CryptoQuant contributor IT Tech said that these inflows likely added pressure to already fragile futures positions. CryptoQuant’s Head of Research Julio Moreno said that these inflows came primarily from large wallets, exacerbating the market’s downward momentum.
Closing of Fragile Positions
As the market’s fragile positions began to unravel, long liquidations also increased. Ethereum long liquidations reached $55 million, while Bitcoin long liquidations reached $90 million, the highest level since August 5. The cascading effect of these liquidations led to a sharp decline in Open Interest, which decreased by $2.2 billion as traders were forced to exit their positions.
Stop-Outs and Liquidations Exacerbate the Decline
The combination of stop-outs and liquidations fueled the market decline. As prices fell, many traders closed their positions, leading to further liquidations and a subsequent decline in Open Interest. This chain reaction contributed to the market’s sharp decline over the past two days.
*This is not investment advice.