Analysis of the Factors Behind Bitcoin Price Fluctuation

In the past week, the Bitcoin market experienced severe fluctuations, making multiple attempts to break through the resistance levels between $24,200 and $24,300 without success. This significant short-term volatility is mainly influenced by four factors: consecutive liquidations, high funding rates, a slowdown in institutional capital inflows, and healthy market adjustments.

The chain liquidation and high funding rates are the main reasons for the market decline. On December 20, Bitcoin started a significant pullback at $24,295. Due to the large sell orders displayed on the exchange at over $24,000, the market anticipated a correction. Subsequently, within 17 hours, Bitcoin dropped to a low of $21,815, a decrease of 10%. Behind this is the chain liquidation across major futures exchanges.

The high leverage in the futures market amplifies the risk of liquidation. The standard leverage ratio can reach up to 100 times, meaning that $1,000 can establish a position of $100,000. The higher the leverage, the closer the liquidation price is to the opening price, increasing the risk of large-scale liquidations. On December 21, when Bitcoin fell below $22,000, hundreds of millions of dollars in long contracts were liquidated. Data shows that the value of futures contracts liquidated within 4 hours reached up to $474 million.

Mass liquidations will trigger severe fluctuations as traders must close positions in a short period. On December 21, many long contract holders were forced to sell, exacerbating the decline in Bitcoin prices.

The funding rate is an important indicator of the long and short sentiment in the futures market. From December 20 to 21, the Bitcoin funding rate reached as high as 0.1%, indicating that going long on Bitcoin has become a crowded trade. For a position of 100,000 USD, the daily funding cost can be as high as 300 USD.

The slowdown in institutional capital inflows may also trigger a healthy correction. Analysts point out that institutions were the main driving force behind Bitcoin's rise in 2020. When the demand from the largest buyers weakens, the likelihood of a deep adjustment increases. However, even if a correction occurs, the cycle may be relatively short.

Some analysts believe that although the increased activity of whales on exchanges leads to a higher risk of selling, strong buying demand may offset the impact of a correction. A positive macro signal is that the outflow of funds from exchanges has decreased, while stablecoin reserves have increased, indicating a reduction in active selling by whales and that over-the-counter funds are beginning to re-enter the cryptocurrency market.

In the short term, institutional demand remains a key factor. Currently, a certain Bitcoin trust fund has a premium of 41%, which is at a historical high, indicating that institutional demand for Bitcoin is still strong. As long as the premium remains high, the risk of a significant Bitcoin correction due to a sharp decline in institutional demand remains relatively low.

Overall, despite the significant short-term fluctuations in Bitcoin prices, institutional demand remains stable, and the market fundamentals have not fundamentally changed. Investors should closely monitor indicators such as institutional fund flows and leverage levels in the futures market, and maintain a rational perspective on short-term fluctuations.