- Bitcoin faced an extremely steep correction on Sunday and Monday after last week’s surge to new all-time highs.
- The cryptocurrency fell as low as $30,000 after peaking at $42,000 last week.
- A large portion of Bitcoin’s drop was apparently a byproduct of Coinbase’s downtime, Willy Woo says.
Monday’s Bitcoin Correction
Bitcoin faced an extremely steep correction on Sunday and Monday after last week’s surge to new all-time highs. On Monday morning, the cryptocurrency plunged as low as $30,000 on top exchanges amid the volatility, over 25% below the $42,000 highs.
As of this article’s writing, the cryptocurrency has recovered to $35,000. Bitcoin recovered as buying volume spiked, according to analysts.
While the cryptocurrency seemingly remains on a path of growth, many market participants were caught off guard by the move lower. According to ByBt, more than $2.8 billion worth of crypto futures positions were liquidated during the drop.
What Happened During the Drop?
Willy Woo, a crypto-asset analyst focused on on-chain trends, recently broke down what happened.
He said that the vast brunt of the Bitcoin market correction was likely a byproduct of Coinbase going down, which resulted in algorithmic traders/bots failing to function. Woo explained:
“Spot market sell off started around $38k, then Coinbase partially failed, not registering buys, causing its price to go $350 lower than others, this pulled down the index price that futures exchanges use to calculate leverage funding, wrecking bearish havoc on speculative markets.”
The price of Bitcoin on Coinbase, along with the prices on other exchanges, strongly diverged during the downturn as each exchange faced different service outages. Woo suggests that Coinbase’s outage resulted in algos dragging the price lower due to high funding rates:
“Unlike previous crashes in the past 2 years, where over-leveraged markets lead by trader liquidation, this one started on spot markets, then was greatly amplified by a single exchange partially failing, yet did not turn itself off for the good of the ecosystem.”
For context, the funding rate is the fee that long positions pay short positions on a reoccurring basis. It is calculated by weighing the price of the futures market to the underlying index, which often includes Coinbase.
Spot market sell off started around $38k, then Coinbase partially failed, not registering buys, causing its price to go $350 lower than others, this pulled down the index price that futures exchanges use to calculate leverage funding, wrecking bearish havoc on speculative markets
— Willy Woo (@woonomic) January 11, 2021
High funding rates are often indicative of an overextended market primed to correct lower.
Although the crash has stopped and Coinbase is now up and running, the Bitcoin funding rate on top platforms remains overextended. Per ByBt, the funding rate of the BitMEX market is at 0.1% per eight hours, which is overextended in most cases.
Bitcoin is not yet in the clear as a result of these funding rates, some say. Yet due to the volume on the uptake, analysts are starting to lean bullish once again.
Featured Image from Shutterstock Price tags: xbtusd, btcusd, btcusdt Charts from TradingView.com On-Chain Analyst Explains What Caused Bitcoin to Plunge from $38k to $30k