After a major cascade of liquidations, the price of bitcoin may be heading towards a recovery according to various network fundamentals. At least $2.7 billion worth of futures contracts got liquidated in the past 24 hours as reported by Bybt.
These liquidations caused the BTC price to experience a major drop in a short time dropping from above $41,000 to below $32,600.
Why Do Mass Liquidations Make Bitcoin to Plunge?
Looking at the futures market, the liquidations of positions happen since traders are borrowing extra capital to trade with huge positions. For instance, exchanges in the BTC futures market normally give up to 100-times leverage. This strategy enables the traders to borrow 100 times their original capital to trade bitcoin.
The shortcoming of leverage is that whenever the price of bitcoin experiences a small drop, it may cause a position to get liquidated or become worthless. For example, if a trader uses 10-times leverage and borrows up to ten times their capital to acquire bitcoin at $36,000 if the price drops 10% to reach $32,400, the position gets liquidated.
Liquidated long on XBTUSD: Sell 1,235,411 @ 34710.5 💯💯💯💯💯💯💯💯💯💯💯💯🔥 ~ Multi kill ~ If you can dodge a liquidation you can dodge anything
— REKT (@BXRekt) January 11, 2021
Whenever a long position gets liquidated, the position is floated for sale in the market. Thus, in case the majority of the market is longing BTC and long contracts start to get liquidated, it develops massive selling pressure.
On January 11, 2021, the bitcoin market experienced a major long squeeze triggered by huge sell orders on Coinbase. As the whales and high-net-worth investors sold, it resulted in many long contracts to get liquidated within hours. These consecutive liquidations led to a domino effect, resulting in a sharp sell-off and a 16% correction.
But one optimistic sign is that the correction ended at almost $32,700, which Whalemap analysts described as a whale cluster support zone.
A whale cluster comes up when whales acquire bitcoin at a certain level and do not move it. That level mostly becomes a support zone since the whales are probably going to double down on their entries in case a major dip happens and the bitcoin price plunges back to that level.
What Comes Next?
Even though bitcoin experienced a major drop, the general market sentiment surrounding bitcoin remains quite optimistic. Based on previous reports, one protocol specialist at Bison Trails, Elias Simos, said that the number of whales always increased after BTC experienced a major price drop.
That trend indicates that whales were accumulating as the cascade of liquidations happened, which is a positive thing. Simos stated:
“Addresses with more than 1k $BTC continue growing at the expense of all others–even as this most recent downturn is taking effect. While you were selling, whales were gobbling up your Bitcoin.”
Glassnode analysts said that the fundamentals of bitcoin remain quite intact despite the drop. They insisted that the bitcoin network’s hash rate and mining difficulty are still hovering at all-time highs. These analysts also noted:
“While $BTC dipped in value today, on-chain fundamentals remain strong, pointing to a healthy network. #Bitcoin mining difficulty and hash rate are at ATHs.”
The latest 15% to 25% drop is the largest pullback for the current bull cycle up to today. But it is worth noting that many 30% corrections happened in the 2017 bitcoin bull cycle. Interestingly, the current pullback in the bitcoin market coincides with a possible bottom formation of the dollar strength index.
For now, bitcoin seems to be on a downtrend. It is hovering around $30,000 and many bears believe that it may drop further towards the $27,700 level. How low will it go and will it recover to continue with the rally?