Bitcoin suffered a price crash earlier on Thursday, having missed record highs by a narrow margin earlier this week.
The top cryptocurrency by market value fell from over $19,300 to $16,327 during the early European trading hours and was last seen trading near $17,200, representing a 10% drop on a 24-hour basis, according to CoinDesk 20 data.
The sudden fall caught many traders off-guard, given the cryptocurrency was trading just 2% short of its record high of $19,783 on Wednesday.
So, what’s behind the $3,000 decline? Here are three of the primary factors responsible for the price drop:
1. Excess leverage
“Bitcoin has fallen victim to a large unwinding of leverage trades in derivatives listed across major exchanges,” Matthew Dibb, CEO of Stack Funds, told CoinDesk.
Nearly $2 billion-worth of derivative positions have been liquidated in the past 24 hours. Of that, more than $1.6 billion-worth has been closed in the past 12 hours, according to data source Bybit.
The unwinding of leverage trades had been expected, as the cost of holding long positions in the perpetual futures market, also known as the funding rate, had risen sharply to a multi-month high of 0.098% in the past few days – a sign of overleveraging, or overheating, in the market. The funding rate is decided and paid every eight hours.
With the price drop, the funding rate has fallen back to 0.011%, according to data source Glassnode. In effect, excess leverage has been crowded out.
2. Technical pullback
Bitcoin’s rally from $10,000 to $19,400 seen over the past seven weeks looked overstretched on the technical charts.
The momentum was so strong that the cryptocurrency consistently traded above its 10-day moving average (MA) throughout the ascent, despite an overbought reading on the 14-day relative strength index (RSI).