09.12.2021

Why is a correction good for Bitcoin’s price over the long term?

Analysts at Coin Metrics are of the opinion that the recent Bitcoin crash should have a good impact on the price of the cryptocurrency in the long term.

In their weekly report, analysts took a look at Bitcoin’s recent correction. Despite the fact that the fall in price coincided with the collapse of the hash rate, the main reason lies elsewhere.

According to Coin Metrics, the fall in BTC was likely due to a cascade of liquidations of heavily leveraged Bitcoin futures positions.

After Coinbase went public, open interest in Bitcoin perpetual futures reached the highest level in history.

As a reminder, open interest is a measure of the total number of active futures contracts. An increase in interest indicates an influx of additional money. If the level of interest is high, the likelihood of a major liquidation is high.

The day before the crash, the number of long positions in perpetual futures peaked in 2021. Due to the fall in the price of bitcoin, positions with excess leverage were liquidated.

While liquidation cascades have a negative impact on price in the short term, they tend to be beneficial in the long term, Coin Metrics said.

The fact that the recent correction is unlikely to interfere with the trend was previously stated in Santiment. As analysts found out, the number of tweets with messages about the purchase of bitcoin reached a weekly high amid the collapse of the cryptocurrency price.

In addition, large investors buy bitcoin during the fall, and at the moment there is a significant increase in the flow of assets to the crypto market.

“During these times of risk aversion, institutional investors have a buy-on-pull mentality that suggests they are increasingly receptive to bitcoin volatility,” writes Cipolaro.

We believe the root cause of the sale is investor positioning, not fundamental news. In other words, traders used large amounts of leverage in long positions, which resulted in forced liquidations. “

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