The market looks healthier this week after its participants were spooked by worrying reports, according to Jeff Dorman, Chief Investment Officer (CIO) at a US-based blockchain- and crypto-focused investment advisor Arca.
As many other cryptos and tech stocks soared, bitcoin (BTC) tanked, said Arca, stressing that the reason behind this is leverage, as it exacerbates price action when something organic causes sell pressure – which is what happened last week.
“Before the much-needed correction, the perpetual swaps funding rate was at 6-month highs, meaning longs were paying shorts almost 25 bps per day for the right to stay long (the funding rate is meant to incentivize participation on the other side to restore balance). Skew was also at all-time negative lows, meaning calls were 40% more expensive than puts earlier in the week, as the put/call ratio sunk to recent lows,” Dorman said. A call option gives the investors the right to buy an asset and a put option gives the right to sell it.
However, according to the CIO, “heading into this week, the market appears to be on much healthier footing following the leveraged unwind.”
That said, while it’s unclear what actually caused the selling, Dorman found that some reports “spooked market participants, even though each was thoroughly dismissed,” these being:
12.6% of the #Bitcoin supply (2.3M BTC) was moved at prices above $30,000 USD.
This is substantial, given that $BTC crossed $30k just this year. It suggests investors are injecting capital, and therefore confidence in further price appreciation.
Chart: https://t.co/Q0OZye5SIk pic.twitter.com/mUFA2cRtPw
— glassnode (@glassnode) January 25, 2021
However, analysts are also discussing a possibility of another drop before shooting higher. “If we start closing below [USD 30,000], then it looks [very] bearish and we’re probably going down to [USD 24,000 – USD 25,000],” said crypto trader Nik Patel. Similarly, Crypto-TA.nl founder Crypto Ed argued that “another leg down is very well possible,” but if the price breaks out of the current pattern and “break [USD 34,000] […] I’m a bull tard again.” And crypto trader Loma finds that “retracement and choppy conditions are a necessary evil” in a run up.
That said, Vijay Ayyar, head of Asia Pacific with crypto exchange Luno, was quoted by Bloomberg as saying that over the next 3-10 years, bitcoin will be “slowly inching away at gold’s market capitalization,” and if that happens, “you are way over [USD] 50,000.”
At the same time, the trend shifted from bitcoin leading the market, retracing and going stagnant, to turning the market over to ethereum (ETH) and altcoins to rally as the assets rotate. “These sporadic spurts of growth in the rest of the digital assets market are usually paired with organic interest – in 2020, Decentralized Finance went through a Cambrian Explosion, and this time Layer 2 (ETH 2.0) growth was the spark that lit the powder keg,” concluded Dorman.
At the time of writing (14:20 UTC), BTC trades at USD 31,691 and is down by almost 9% in a day and 14.6% in a week, trimming its monthly gains to less than 16%. The price is up by 264% in a year.
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