The news about the return of $10 billion to former Mt.Gox clients became the most discussed topic in the crypto space this week. Leveraging its impact, cryptocurrency skeptics were quick to declare the start of a bear market. Economist Peter Schiff, for instance, criticized ETF buyers who chose Bitcoin, pointing out that the refunds from Mt.Gox hadn’t even begun yet, and Bitcoin-ETF buyers were already experiencing a 24% drop compared to gold, questioning how long it would take for them to recognize their mistake.
However, this is a superficial view of the nature of price formation. Yesterday, we explained why the refunds to Mt.Gox clients won’t have long-term negative consequences. Today, let’s delve into the reasons behind the recent correction.
Profit-Taking Amid Price Peaks
The first reason is obvious and simple: profit-taking during a price record update. For example, long-term holders (often referred to as ‘whales’) set a record by selling $1.2 billion worth of coins in the first two weeks of June.
Long Squeeze in the Derivatives Market
The second reason lies in the “long squeeze.” Excessive optimism in the derivatives market leads to an overabundance of long margin positions and a rise in the funding rate. When the price drops, it triggers a cascade of liquidations. Over the past day, bullish positions worth $157 million were forcibly liquidated.
Hedge Funds Selling Bitcoin on the Spot Market
The third reason is the sale of Bitcoin by hedge funds on the spot market. While the price stayed near its highs and traders mainly opened long positions, arbitrage trading flourished. Hedge funds sold futures contracts on the CME and bought an equivalent amount of coins on the spot market (including through ETFs). The profit came from the positive funding rate (the cost difference between the contract and the underlying asset).
As soon as the funding rate returned to a neutral level, hedge funds began rebalancing their positions (closing futures contracts and selling Bitcoin on the spot market).
Market Reaches Equilibrium
The market is now finding its equilibrium as long-term holders have reduced profit-taking, the overheating in the derivatives market has subsided, hedge funds have slowed their spot market sales, and frightened investors have digested the news about Mt.Gox.
After a prolonged seven-day sell-off, a symbolic positive inflow of $31 million into Bitcoin-ETF was registered on June 25.
