Bitcoin experienced a series of major falls in April. What is the reason for the collapse

The funding rate in Bitcoin trading has dropped to its lowest level in the past seven months, with the last time it was this low in September 2020.

This time, the decrease in the funding rate occurred against the backdrop of a sharp collapse in the price of the cryptocurrency below the $ 52 thousand line on April 18. According to trader and analyst Lex Moskovsky, what happened indicates a change in the mood of most market players, that is, many are now beginning to develop fear of the continued decline in BTC. And this is a good risk opportunity. Let’s talk about the situation in more detail.

Today, Bitcoin is trading at $ 54,370, down 6.2 percent from a day ago. Over the past week, the BTC rate also reached $ 64,495, so the current drawdown has become very noticeable.

This is what Bitcoin’s chart looks like for the last week.

Against this background, the top ten coins also do not look the best. However, this has already happened during this run of the coin market.

Why Bitcoin fell

Let’s start with an explanation. Cryptocurrency exchanges with BTC futures use a mechanism called the funding rate to balance the market. The principle of the mechanism is simple: if there are more long positions in the market [that is, those willing to bet on asset growth – editor’s note] or buyers, the financing rate increases. The opposite is also true – if there are more sellers, the indicator falls.

If the rate is positive, long Bitcoin holders pay interest to sellers, and vice versa. In the end, it all comes down to the fact that the funding rate should «bring the market into balance.» Now the rate has reached negative values ​​for the first time since September last year, which means that many short positions are again opened on the market. The more there are, the more traders are selling BTC amid fears of a further collapse of the cryptocurrency.

Earlier last week, Bitcoin hovered around $ 64K in anticipation of a public listing of Coinbase shares. Already at the lowest point of the day on April 18, BTC fell to $ 50,000. From the daily high to the low, the Bitcoin price fell nearly 15 percent.

Market sentiment can change so quickly because many traders use high leverage on the trading floors. That is, they use borrowed money from cryptocurrency exchanges to open positions in order to maximize their own profits. At the same time, they also increase the risk, because if the rate goes in the wrong direction, their position will be liquidated. And the more such positions with large leverage, the larger the collapse of the market as a whole, since, in fact, the liquidation of some positions gradually lowers the rate due to the sale of assets and leads to the liquidation of others.

During the week of Coinbase going public, the funding rate for BTC trading was stable at 0.1 percent to 0.15 percent on leading exchanges like Binance and Bybit. This shows that many traders bought cryptocurrencies aggressively, which made the futures market incredibly overheated. When this happens, the incentive to sell BTC increases significantly, and this exposes the market to the risk of a large cascade of liquidations, which we mentioned above.

Until today, Bitcoin has not yet been able to gain a foothold above 55 thousand dollars. The sharp drop in cryptocurrency also has another potential reason – power problems in the Xinjiang region of China, due to which local BTC miners were unable to support the mining of the cryptocurrency. For a short period of time, the hashrate of the Bitcoin network – that is, the total amount of computing power – even decreased by almost half.

However, according to Adam Cochran, a spokesman for Cinneanhaim Ventures, this fundamental factor has little to do with a correction. Here is his line, quoted by Cointelegraph.

The rumor that a power outage last night in a mining region in China caused BTC to plummet is complete nonsense. There is no proven correlation between these events.

If so, the crash was caused by the exceptionally high appetite of the bulls in the market, who used large leverage in margin trading. In such a situation, a cascade of liquidations of positions can indeed lead to a sharp decline in the price, but this also increases the likelihood of an early recovery in the value of BTC in the near future.

In addition, it is important to remember that crashes in Bitcoin and other cryptocurrencies in the market are natural even during stages of growth. Without them, the industry would have overheated too quickly and turned towards a bearish trend. Therefore, you should not worry too much about what is happening. For clarity, we show a graph of the latest BTC corrections.

We believe that the current market situation is not a big surprise, since this has happened several times before. Short-term collapses are indispensable even at the sharpest stages of growth, which was also proved by the 2017 bull run. In addition, such drawdowns open up great opportunities for investors, because after serious depreciation of the exchange rate, noticeable jumps usually follow during the growth stage. However, before investing, always do your own research on the project and its performance.

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