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The bitcoin price plunged by around eight percent overnight against the USD in one of the strongest long squeezes in recent months.
The pullback stopped right at 200-day exponential moving average (EMA), and the dominant cryptocurrency has started to show signs of recovery.
Bitcoin is recovering at a key level
The 200-day EMA is an indicator that is used by traders across various sectors as a key level to decide the short to medium-term trend of an asset.
Often, when an asset surges significantly in a short time frame, it becomes vulnerable to a steep sell-off.
Especially in a market like cryptocurrency that is heavily dominated by high leverage margin trading platforms, the short-term trend of assets are typically decided by short and long contract squeezes.
After hundreds of millions of dollars worth of long contracts were liquidated overnight, the bitcoin price has begun to rebound.
According to James Todaro, managing partner at Blocktown Capital, the bitcoin price recovered right at 200 EMA, suggesting that the bullish market structure has not been broken from the minor correction.
“First test of the 200 EMA daily for Bitcoin. This is why I said the market was not bullish yesterday with the funding spiking hard for longs,” said Jacob Canfield.
While some traders anticipate that the bullish market structure of bitcoin could be held with $8,500 acting as support, other technical analysts foresee the eight percent drop causing a more severe correction over the next two months, before the halving.
What triggered the sudden drop?
Prior to the pullback, technical analysts and traders like Jacob Canfield emphasized that there are glaring signs that the market could correct in the short-term.
One of the indicators was the funding rate of perpetual futures contracts on BitMEX and Binance.
Margin trading platforms in the cryptocurrency market use a system called funding to incentivize traders to either long or short based on the market trend.
If there are more longs in the market, it becomes expensive to long and if there more shorts in the market, it becomes more costly to place a short.
Before the pullback occurred, the funding rate of Ethereum, in specific, was at around 0.15 percent. That means, if a trader opens a $100,000 worth long contract, it costs $450 a day to sustain the long contract.
When the price starts to going down and funding rates remain high, traders are longing the bitcoin market have no incentive to maintain in a long.
That causes traders to adjust their positions and close their longs, which then turn into market sells, changing into selling pressure.
Given that a cascade of long contract squeezes was the primarily factor behind the overnight correction, the strong support level of bitcoin at 200-day EMA is expected to lead short-term recovery.
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