BTC traders to refrain from taking high leverage risk as Bitcoin crashes due to whale selling

Bitcoin price seemingly took a major hit on Monday, falling to $40,000 at one point before recovering to $42,000.
According to the Coinbase Premium Gap (CPG) plunge, the crash was caused by the intervention of whales.
Since the beginning of December, investors have avoided taking high-leverage risk in the derivatives trade.

Bitcoin price is seeing the highest decline it has in almost a month. The market was expecting a bullish continuation until the Securities & Exchange Commission (SEC) approves a spot BTC ETF in January 2024. However, the sudden drop in the market surprised investors on Monday, which resulted in the breakdown of this optimism, also known as “panic”, caused by whale selling.

Daily Digest Market Movers: Bitcoin whales crash the market

Bitcoin price nearly fell below $40,000 over the past 24 hours and liquidated over $340 million worth of long contracts in the span of mere minutes. While the definite reason behind this crash is uncertain, the most plausible reason is whale selling.

This is evidenced by the Coinbase Premium Gap (CPG) noting the premium falling to -250. The CPG, put simply, is an indicator that tracks the difference between the Bitcoin price listed on Coinbase (USD pair) and Binance (USDT pair). This provides an idea of whether US dominant investors (Coinbase) or global users (Binance) are buying or selling more than the other.

Premium of CPG(Coinbase Premium Gap) 250 Occurred chart https://t.co/FBzSNVkW1j

via @cryptoquant_com @CryptoQuant_KR
— mignolet (@mignoletkr) December 11, 2023

Whenever this premium gap is positive, the US investors are considered to be driving the buying, whereas a negative value points at global users, creating buying pressure.

However, as the indicator plummeted on Monday, it suggested that there has been an intervention by whales. This was further verified by the decline in Binance's exchange reserves, which noted the selling of about 16,000 BTC worth over $671 million that had been accumulated in the past week.

This sell-off caused panic among users, resulting in a crash of 7% during the intra-day trading hours, which saw BTC fall to $40,654 at its lowest. The cryptocurrency has since recovered, trading at $41,839 at the time of writing.

Since December began, traders have been refraining from taking high-leverage risk in the derivatives market. This is evidenced by the dip in the leverage ratio. Monday’s crash is likely going to further this skepticism and keep traders from making large bets until January.

Estimated leveraged ratio

Technical Analysis: Bitcoin price to stabilize around $42,000

Bitcoin price recovered slightly in the last couple of hours to rise back to $42,000. This price is a crucial technical and psychological support level that BTC could hover around for the next couple of hourly trading sessions.

As observed in the chart below, the cryptocurrency was bound to observe some correction, given the bearish divergence noted last week. The divergence caused by Bitcoin price charting higher highs and the Relative Strength Index (RSI) posting lower highs tends to foreshadow a decline, which is what has happened in the last two days.

Going forward, if BTC fails to sustain above $42,000, it might witness a retest of $40,000, which could send it toward $38,000.

BTC/USD 1-day chart

But if bulls attempt to take the control back and investors buy BTC at the slightly lower price, Bitcoin price could recover. Breaching $43,000 would invalidate the bearish thesis and set the crypto asset back on track to trade at $44,000.

Open Interest, funding rate FAQs

How does Open Interest affect cryptocurrency prices?

Higher Open Interest is associated with higher liquidity and new capital inflow to the market. This is considered the equivalent of increase in efficiency and the ongoing trend continues. When Open Interest decreases, it is considered a sign of liquidation in the market, investors are leaving and the overall demand for an asset is on a decline, fueling a bearish sentiment among investors.

How does Funding rate affect cryptocurrency prices?

Funding fees bridge the difference between spot prices and prices of futures contracts of an asset by increasing liquidation risks faced by traders. A consistently high and positive funding rate implies there is a bullish sentiment among market participants and there is an expectation of a price hike. A consistently negative funding rate for an asset implies a bearish sentiment, indicating that traders expect the cryptocurrency’s price to fall and a bearish trend reversal is likely to occur.

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