Will Bitcoin fall victim to market overconfidence this Q4?
- Bitcoin bulls showed up in response to rate hikes as the market receives a confidence boost. Evaluating the risk of long liquidations as volatility makes a comeback.
Bitcoin [BTC] responded positively to the Federal Reserve’s latest announcement regarding interest rate cuts. The highly anticipated decision revealed that rates will come down by 50 basis points.
Investors responded to the interest rate cuts by engaging in a Bitcoin buying spree that pushed the price above $62,000 for the first time this month.
This was in line with previous speculation, since lower rates are expected to have a positive impact on liquidity flows in risk-on assets. But the real question is, where does the market go from here?
A bumpy ride ahead for Bitcoin?
There are high expectations around Bitcoin, especially now that interest rates are coming down. While this may support more upside in the next few months, it also paves the way for more volatility.
Translation, more unexpected pullbacks and highly volatile price movements.
A classic example of why Bitcoin will face more volatility is that high expectations lead to more optimism and a higher appetite for leverage. More long positions are likely to be executed now.
Meanwhile, whales and institutional players see this as open season for liquidations.
Market data coincides with the above expectations. For example, Open interest just soared to its highest level in the last seven weeks.
The estimated leverage ratio which shows the level of leverage at any given time has been rallying since August lows.
It pulled back slightly since the 13th of September but is poised to tick higher with recent improvement in market sentiment.
Source: CryptoQuant
Speaking of sentiment, the rate cuts announcement appears to have had a positive impact on Bitcoin ETFs. There was roughly $52.83 million worth of Bitcoin ETF inflows on the 18th of September.
Positive ETF flows and expected liquidity injections should set the stage for a healthy Bitcoin run-up. However, it may also pave the way for heavy liquidations and pullbacks along the way.
Assessing recent demand
Bitcoin is still at risk of liquidations that may occur soon. On-chain data revealed that the recent wave of liquidity injection into Bitcoin has already dissipated, evidenced by the buy volume (blue).
We also observed a spike in longs (red) which may be at risk of liquidation if the market pulls back unexpectedly.
Source: Hyblock Capital
The presence of highly leveraged long positions may pave the way for whales and institutions to manipulate prices.
Despite the possibilities of a retracement, higher liquidity flows are expected to push Bitcoin higher in the next few months.
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