The price of Bitcoin declined by 16% in six hours after an explosive rally to above $34,000. The correction occurred as the derivatives market became extremely overheated.The Bitcoin futures market can become overcrowded if the market is dominated by either short-sellers or buyers. If either one overwhelms the market, then the probability of a short or a long squeeze occurs. This can create an extreme spike in volatility in a short period.The Bitcoin futures market was extremely overheatedThat is what happened to Bitcoin on January 4. The market was overwhelmed by buyers, which caused the funding rate of Bitcoin futures contracts to surge above 0.2%.The futures funding rate is a mechanism that incentivizes either buyers or sellers based on market balance. If the market has more buyers, then buyers have to pay a fee to maintain their position, and vice versa.A short squeeze refers to a scenario wherein short-sellers are forced to market-buy their positions. A long squeeze is the opposite, when buyers are forced to sell their positions.On January 3, a long squeeze occurred because the market was dominated by buyers. When a minor sell-off occurred, the entire market plummeted violently within a short period.
“I’ll patiently wait for the moment the funding rate cools down. $BTC could go up more, but it’s too dangerous.”
Previously, Ki explained that in a spot market-driven rally, it is important for the funding rate to remain low. He said:
“In this spot-driven & up-only market, a low funding rate could be a buy signal. It seems not a good idea to wait for a correction when institutions buying $BTC.”
Scott Melker, a cryptocurrency trader, similarly said that Bitcoin was overbought. The 4-hour candle chart showed an overbought bearish divergence, which historically led to corrections. He said:
“Line charts can eliminate the noise. Overbought bear div on the 4-Hour, clear head and shoulders. Already shot well past its target (wick not shown on line chart). I want to see RSI make the trip to oversold, finally. It’s inevitable, better now than later.”