The price of Bitcoin (BTC) pulled back after achieving a new 2020 high at $12,486 on Coinbase. In the last 48 hours, BTC fell by around 5%, leading to larger losses in the altcoin market.
There are three key reasons why Bitcoin rejected at the $12.4k level, namely major resistance, high funding rates, and an overheated rally. But traders believe it was a healthy pullback that could strengthen the momentum of BTC.
Is a $1,000 correction healthy?
As seen in previous Bitcoin price cycles, the digital asset typically sees a rapid upsurge followed by a sharp correction.
For instance, from January to February 2020 Bitcoin price rose from $7,400 to as high as $10,500. In the subsequent month, the price of BTC declined to pre-January levels.
Bitcoin price also sees massive spikes in volatility likely due to the futures market. When BTC sees a relatively large upsurge or a drop, it causes a cascade of liquidations to occur, resulting in large price movements.
The minor pullback over the last 48 hours allowed funding rates to neutralize, meaning, the futures market is no longer overcrowded with long contracts and overleveraged positions have been flushed out.
A potential consolidation phase for Bitcoin. Source: Michael van de Poppe
Some traders say that it was a healthy pullback, which might temporarily lead to a period of stabilization or consolidation. Michael van de Poppe, a full-time trader at the Amsterdam Stock Exchange, said he wouldn’t be surprised if BTC trades sideways between $12,200 and $11,200 in his latest technical analysis.
Similarly, Nik Yaremchuk, an on-chain analyst and cryptocurrency trader, said BTC is showing signs of a previous fractal found in May 2019. At the time Bitcoin saw two minor corrections, recorded several weeks of consolidation, then rallied to a new high.
Bitcoin price cycle fractals. Source: Nik Yaremchuk
Bitcoin often sees historical fractals play out because the market likes to move in a cycle, both in the short and the long-term. Yaremchuk noted:
“Another fractal: We have a similar base as in May 2019. Feels like it is 1: 1, cus in both cases we have triangle and wedge inside the Ascending Broadening Wedge. It doesn't look as perfect and bullish as it did before, but after we get $11.3k-$11.4k it'll be a new rally.”
The price of BTC tends to consolidate after seeing a major rally, especially before entering a key resistance range between $12,000 and $14,000.
Selling pressure continues to decline
Since June, a consistent theme throughout the current Bitcoin bull trend has been declining selling pressure across the market. On-chain analysts at Glassnode explained that Bitcoin reserves are much lower than the previous BTC top in July 2019. They stated:
“The decline of BTC exchange balances signals reduced selling pressure. Currently 2.6M BTC are being held on exchanges. Significantly lower than the last time BTC hit a local top a year ago (2.8M), and lower than before the sell-off in March (2.9M).”
The confluence of a neutral futures market, historical fractals showing similar price action, and declining exchange reserves support Bitcoin’s medium-term bull case.