The price of Bitcoin (BTC) plunged on November 26, merely hours after nearing its all-time high. Bitcoin achieved $19,484 on Binance before falling to as low as $16,334 within 19 hours. The strong correction comes as various on-chain data points and indicators show the recent rally saw more organic buyers than previous bull cycles.
Four Data Points Show the Medium-Term Outlook of Bitcoin is Optimistic
Four on-chain indicators have shown that the Bitcoin rally to $19,484 was driven by organic demand. Tether (USDT) inflows, short-term holder MVRV, realized price, and sender address activity all demonstrate one common trend: accumulation of Bitcoin at high price points.
First, USDT inflow or the inflow of the stablecoin Tether into exchanges indicate that there has been organic buyer demand throughout the rally. USDT inflow is an indicator that can be used to gauge overall investor confidence because lots of sidelined capital within the cryptocurrency market are stored in stablecoins.
As Elias Simos, a protocol specialist at Bison Trails, explained, the circulating supply of USDT has continuously increased in tandem with the price of Bitcoin. This shows that sidelined capital entered back into the Bitcoin market, pushing the price of BTC upwards.
Second, the short-term holder MVRV indicator shows the behavior of short-term investors by analyzing addresses that are younger than 155 days. When short-term MVRV stays above the average level, which means short-term holders are not selling, the bull market has historically remained intact.
Throughout 2020, as Glassnode analysts explained, the short-term holder MVRV has remained above the same level it saw during previous bull runs, like the December 2017 rally. It shows that both short-term and long-term investors have demonstrated confidence in the uptrend.
Third, the realized price or realized cap of Bitcoin has substantially increased during this rally. The realized price of Bitcoin is calculated by dividing the market cap of Bitcoin by the price at which investors bought the cryptocurrency. If the realized price is high, it shows that investors generally bought BTC at a higher price than before.
Based on the realized cap of Bitcoin, on-chain analysts have said that the recent rally has been an organic rally. Willy Woo, a Bitcoin on-chain analyst, explained:
“Organic price action happens when BTC price tracks closely with investor capital entering and leaving. When it's inorganic BTC price is dominated by short term derivative traders.”
Fourth, the sender address activity reached a new all-time high on November 13, according to data from Glassnode. Albeit this metric does not particularly depict an optimistic market sentiment, it indicates that the network activity of the Bitcoin blockchain has been high.
Bitcoin is a peer-to-peer blockchain network at its core. Hence, if fundamental metrics, such as address activity, sender activity, hash rate, and transaction volume rise together with the price, it suggests that the uptrend is fueled by strong fundamentals.
Why Did Bitcoin Drop So Quickly Despite Strong Fundamentals?
On November 26, the price of Bitcoin dropped steeply across major cryptocurrency exchanges. On Binance, the price of Bitcoin dropped from $18,915 to $16,188, recording a 14.5% decline on a single day.
Although the market sentiment around Bitcoin has been positive and there were many fundamental metrics that backed the rally, there was one key issue.
The derivatives market was overly leveraged with buyers or long contract holders using a high margin. When the derivatives market becomes overheated, the funding rate of the Bitcoin futures contract increases.
The funding rate in the futures market refers to a rate that long or short contract holders have to pay to keep their positions open. If there are more buyers in the market, the funding rate turns positive and the buyers need to pay the sellers, and vice versa.
In the case of Bitcoin in the past week, the funding rate soared to as high as 0.18% on several exchanges and ranged in between 0.09% to 0.18%. When the price of Bitcoin dropped slightly, it caused shockwaves throughout the futures market, eventually causing a sharp BTC price drop.
Woo explained that the recent uptrend was reminiscent of the 2017 rally of Bitcoin when retail investors flooded the futures market. He said:
“The last phase of the run to ATH resistance was marked by smaller buyers, a class inrush of noob FOMO. That said, the rate of those new users coming last week was the highest we've seen in this bull cycle, right up there with 2017 mania levels.”
Considering that the derivatives market was so overcrowded, a massive pullback was inevitable. But, there are still strong fundamental factors that could fuel the recovery of Bitcoin.
Following the marketwide correction, the funding rate of Bitcoin has reset to 0.01%. If Bitcoin begins to recover, the low funding rate would allow for a more sustainable uptrend.
In the short term, the probability of Bitcoin seeing low volatility remains relatively high, because the futures market was severely damaged from the recent fall. It would likely take some time for the futures market to see a considerable increase in open interest once again.
Peter Brandt, a long-time technical analyst and chartist, said the possibility of another Bitcoin drop remains. But, the analyst said that the dominant cryptocurrency has not peaked, emphasizing that it still has room for a broader rally.
Technically, it would be crucial for Bitcoin to remain above the $16,200 support level, which it has defended during the drop on November 27. As long as Bitcoin remains stable in between $16,200 to $17,700, the momentum of the Bitcoin could resurge and the probability for a rally continuation would increase.
