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‘Animal spirits’ in Bitcoin prompt warnings of wild price swings as it nears new record

‘Animal spirits’ in Bitcoin prompt warnings of wild price swings as it nears new record
Snapshot
Bitcoin derivatives markets flash warning signals as bullish bets stretch market. Credit: shutterstock
  • Bitcoin hurtled nearer to its record high of $69,000 on Monday.
  • The digital asset is at its highest level since November 2021, but for how long?
  • Action in the derivatives market has led to volatility warnings from analysts.

With Bitcoin just a few points from hitting new all-time highs, analysts warn of a potential crash and sharp volatility.

Analysts warn of increased volatility and a potential pullback in the short run as Bitcoin hurtles above $66,000.

Funding rates

Bitcoin just hit its highest level since November 2021 on Monday.

Its euphoric 28% rise over the past week hasn’t been enough for some, however, as seen in the ever-frothy derivatives market.

“Animal spirits seem to have returned to the market,” Kelly Ye, head of research at Decentral Park, said in a report on Monday, alluding to high funding rates for Bitcoin perpetual futures contracts.

These are a popular derivative predominantly used in crypto that has no settlement date.

The higher rates could lead to a spike in volatility, Ye warned.

Bitcoin’s implied volatility has also risen to its highest level since December. Funding rates spiked then, too, as traders bet on the approval of spot Bitcoin exchange-traded funds in the US.

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Prices in perps markets are managed through a mechanism known as “funding rates.”

Funding rates involve traders holding long positions paying those with short positions or vice versa. If the rate is positive, traders with long positions pay shorts to maintain their positions — the opposite applies if negative.

In essence, traders going long are paying massive amounts to maintain loans on bets that Bitcoin will continue to rise.

This mechanism means the price of the contract closely follows the underlying spot price.

A high positive funding rate suggests traders are taking on too much leverage, or placing risky bets, on the price of Bitcoin rising.

Bitcoin crashed 5% in January just after funding rates rose about 0.12%. This triggered around $500 million in liquidations across all cryptocurrencies as $110 million in Bitcoin long positions were wiped out.

Funding rates are currently elevated around 0.11%, according to data from CoinGlass.

Memecoin mania rides Bitcoin’s coattails

The fervour isn’t contained to Bitcoin perps, though.

Bitcoin futures and options markets are all “generating wild overheated signals,” Jamie Coutts, an independent analyst who formerly worked at Bloomberg Intelligence, said on Monday.

Traders “must be banking on ETF demand to soak up the volatility” that comes with these trades, Coutts said.

It’s likely just “blind ignorance of the risks,” Coutts added, pointing to the rally in dog-themed memecoins, like dogwifhat and shiba inu, as evidence of market froth.

Trading volumes for memecoins on Ethereum soared by 60% in February from January, reaching over $6.4 billion. Dogecoin and shiba inu rose by 100% and 200% over the past seven days, respectively.

“By the way, this doesn’t affect my cycle prediction for BTC — just a recognition for an intermediate pullback, which is natural when you get this degree of silliness,” he said. Coutts previously predicted Bitcoin could rise to between $92,000 and $170,000 by the end of 2025.

While implied volatility flashes warning signals and analysts pray caution, that doesn’t mean levered traders will take their foot off the gas.

Between 2020 and 2021, the peak of last cycle’s rally, funding rates remained elevated for six months, Coutts said.

Bitcoin rose from $30,000 to $65,000 during this period, before crashing back to $30,000 again in 2022.

The market structure is different now, he said, alluding to the introduction of spot Bitcoin ETFs in the US and the institutional money flowing into these funds.

Coutts also warned against using leverage.

Crypto market movers

  • Bitcoin gained 6.6% in the last 24 hours, trading at around $66,000.
  • Ethereum added 3.4% in the same period, reaching $3,500.

What we’re reading

Adam Morgan McCarthy is a market correspondent at DL News. Got a tip? Email him at adam@dlnews.com.

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