Bitcoin's recent price fluctuations have been severe, influenced by multiple factors affecting the market trends.

In the past week, the price of Bitcoin experienced extreme fluctuations, repeatedly testing the resistance range of $24,200 to $24,300 without success. Behind this significant price volatility in the short term, multiple factors have influenced it, including chain liquidations, high funding rates, a slowdown in institutional capital inflow, and natural market adjustments.

Chain liquidation and high funding rates lead to price decline

On December 20th, Bitcoin experienced a significant pullback at the position of $24,295. At that time, the exchange heat map showed a large number of sell orders above $24,000, leading the market to anticipate a pullback. In the subsequent 17 hours, the price of Bitcoin dropped to a low of $21,815, a decline of 10%. This sharp drop was primarily triggered by a chain liquidation within major futures exchanges.

In the futures market, traders often use high leverage for trading. For example, the standard leverage ratio in the Bitcoin futures market can be as high as 100 times, meaning that a position of $100,000 can be established with just $1,000. The higher the leverage ratio, the greater the liquidation risk. On December 21, as the price of Bitcoin fell below $22,000, long contracts worth hundreds of millions of dollars were liquidated. Data shows that futures contracts worth $474 million were forcibly closed within 4 hours.

Mass liquidation in the chain will trigger significant fluctuations, as it forces traders to buy or sell positions at market price within a short period. In this event, a large number of long position holders faced liquidation, further driving the Bitcoin price downward.

An important indicator for assessing the sentiment of the futures market is the funding rate. Futures exchanges use a "trading compensation" mechanism to maintain market balance. When the market leans towards buyers, buyers need to pay additional fees to sellers, and vice versa. Between December 20 and 21, the funding rate for Bitcoin reached as high as 0.1%, which indicates that going long on Bitcoin has become a crowded trade.

Institutional capital inflow slowdown may trigger a healthy pullback

Some analysts point out that if institutional capital inflows slow down, it may increase the risk of a Bitcoin pullback. Throughout 2020, institutional investors have been the main force driving Bitcoin's rise. When the demand from the largest buyers begins to weaken, the possibility of a deep correction increases.

However, some on-chain analysts believe that even if a correction triggered by a slowdown in institutional demand occurs, its duration may be relatively short. They point out that although there is a risk of large whales selling Bitcoin on exchanges leading to a pullback, strong buyer demand may quickly offset this impact.

The macro trend still shows positive signals

From a macro perspective, a positive trend is that the outflow of funds from exchanges is decreasing, while the reserves of stablecoins on exchanges are increasing. This indicates two points: first, the large holders actively selling on exchanges may be decreasing; second, some cautious funds are beginning to re-enter the cryptocurrency market.

Investors typically store the funds obtained from selling cryptocurrencies in stablecoins, as it is more convenient to use stablecoins to purchase other cryptocurrencies. Therefore, an increase in the exchange's stablecoin reserves indicates that investors are reinvesting funds into Bitcoin and other major crypto assets through stablecoins.

Short-term Uncertainties

In the short term, one uncertain factor affecting the price trend of Bitcoin is a well-known cryptocurrency investment trust. Data shows that the premium of the Bitcoin trust in this fund has reached 41%, which means that the Bitcoin purchased by investors through this fund is 41% higher than the spot price.

The emergence of this high premium phenomenon is mainly because there is currently no Bitcoin ETF in the United States, making this fund the preferred investment tool for many institutions and qualified investors. As long as this premium remains near historical highs, the likelihood of a significant reduction in institutional demand for Bitcoin in the short term is relatively low. Considering that there are no obvious signs of a decline in the premium at present, the probability of a significant pullback in Bitcoin due to reduced institutional capital inflow remains small.