What caused Bitcoin to crash this week?

After several weeks of continuous rallies cheering the market in hopes of reaching the long-awaited $100,000 at last, the crypto-actives markets have taken a heavy setback this week, with Bitcoin (BTC) and Ether (ETH) dropping by double digits.

Despite the relatively severe correction, there is no clear catalyst other than market forces pushing prices down. Derivatives markets pointed out that Bitcoin was potentially being overrated as it hit new highs.

Perpetual swaps are the most traded Bitcoin futures instruments. They charge traders a financing fee to keep prices tied to spot markets.

As Bitcoin hit new highs above $65,000, financing rates jumped to the highest since May, indicating that traders who were buying were willing to pay higher fees to bet on BTC’s rise.

After the recent drop, funding rates have dropped to almost zero, pointing to a market deleveraging and taking a more neutral stance.

Source: ITB

By diving into the network data, we can better understand how the market has adjusted to the recent decline. Here we can observe a decrease in the supply of cryptoactives available for sale.

Source: ITB

Drop in the supply of cryptoactives on exchanges

Bitcoin and Ether saw net amounts of more than $1 billion leave exchanges centralized this week.

In the last 30 days, Bitcoin and Ether presented net outflows of around US$6.4 billion and US$4.7 billion, respectively.

Less supply available for sale can potentially lower sales pressure. In the case of Ether, a significant proportion is being deposited into DeFi with the total amount blocked reaching a record 41 million ETH (~35% of circulating supply) according to data from DeFi Llama.

Network data can also help us determine key areas of buy/sell pressure based on historical trading activity. The In/Out of the Money (IOMAP) indicators compiled by IntoTheBlock (ITB) group address groups according to their average purchase cost, providing an indication of price levels that are expected to act as support or resistance.

Source: ITB

Bitcoin is currently at a high level of support between $55,000 – $56,000, where 970,000 addresses have acquired over half a million BTC.

If that level breaks, there may be some buying activity at $53,000, but the highest support level is closer to $50,000.

On the other hand, 600,000 BTC were previously purchased at just over $60,000, which is expected to act as a hot spot for sellers before potentially aiming for new highs.

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