Bitcoin has shed much of the weekend’s stellar gains, as relatively cheap alternative cryptocurrencies play catchup with the crypto market leader.
At the press-time price of around $29,000, bitcoin (BTC, -5.03%) is down over 13% on a 24-hour basis, according to CoinDesk 20 data. Prices have declined by well over $4,000 in the last two hours, having reached a record high of $34,347 on Sunday.
“Bitcoin is having a much-needed reset. After a period of increased leverage and high [perpetual] funding rates across derivatives platforms, a brief consolidation around these levels is required,” Matthew Dibb, co-founder, and COO of Stack Funds, told CoinDesk.
Bitcoin’s perpetual funding rate (the cost of holding long positions) jumped to an 11-month high of 0.137% early today, signaling excess bullish leverage and scope for a price drop similar to the one seen in late November. With the pullback, the funding rate has declined only slightly to 0.122%.
Trader and analyst Michaël van de Poppe said a correction was overdue after the overextended vertical move.
The cryptocurrency surged by $5,000 to above $34,000 in the first three days of 2021, having rallied by over 165% in the final quarter of 2020. The breakout above $30,000 happened alongside large outflows from the Coinbase Pro exchange, a sign of institutions buying the cryptocurrency, according to some analysts.
“Most likely money is shifting from bitcoin towards altcoins or just temporary profit-taking is causing a price drop,” Poppe told CoinDesk. Investors may have rotated some money out of bitcoin and into relatively cheap prominent alternative cryptocurrencies such as ether (ETH, +12.05%), stellar (XLM, +3.69%), chainlink (LINK, +2.34%) and litecoin (LTC, +2.92%). These coins have outperformed bitcoin in the past 24 hours.
Ether, the second-largest cryptocurrency by market value, rose to 35-month highs above $1,150 early Monday and is currently trading near $920, representing an 11% gain on a 24-hour basis. At press time, litecoin is changing hands at its highest since April 2018, and bitcoin cash (BCH, +2.96%) is trading at 11-month highs.
Ether was was up 30% during the early European trading hours before it was dragged lower by bitcoin. Other coins have also trimmed gains, but are still outperforming bitcoin.
Dibb predicted a continued rotation of capital into ether and other altcoins as bitcoin slows down. However, options market data shows investors expect bitcoin to remain highly volatile in the short-run.
Bitcoin’s one-month implied volatility, which gauges investors’ expectation of how volatile an asset would be over the next four weeks, has risen to near 100%, the highest level since March 2020, according to data source Skew.
“Bitcoin’s implied volatility has hit a ten-month high because options traders assume that the major moves in the price action over the past ten days – which has seen BTC increase to well over $34,000 – will continue,” Sui Chung, CEO of CF Benchmarks said.
Analysts, however, expect bitcoin dips to be short-lived. “Our thesis remains extremely bullish, with a target of $40,000 BTC by February,” Dibb said.