Historically low spot volumes and investor indecision weigh on Bitcoin price

If one word could be used to describe how the majority of participants in the cryptocurrency ecosystem feel about the near-term outlook for Bitcoin (BTC) it would be 'undecided', as mixed signals from all manner of indicators have many traders waiting for a significant move in either direction before planning their next entry point. 

A new report from Delphi Digital took a macro look at Bitcoin's current price action and found that a variety of factors, including low exchange volumes and the strengthening U.S. dollar have weighed heavily on the top cryptocurrency.

Bitcoin's recent dip to $31,000 adds to the aura of fear that currently envelops the crypto market and analysts are now warning that failure to close above $31,000 could see BTC drop to the $29,000 to $24,000 zone.

Here are three areas of focus that Delphi Digital highlights as being the most impactful on the short-term price action for Bitcoin

Spot volumes and open interest collapse

According to Delphi Digital, declines in trading activity are one of the biggest factors affecting the market. This is because after the May 19 sell-off there was an exodus of spot and derivatives traders from exchanges.

As seen in the chart above, after seeing a substantial increase during the first half of 2021, exchange volumes have fallen by more than 60% as prices collapsed and traders swore off using leverage.

The precipitous drop in BTC price also helped to tamper down retail traders' use of high leverage in derivatives markets and proof of this comes from BTC futures open interest dropping back to levels seen since early 2021.

Delphi Digital said:

“This purge has caused significant damage to the bullish market structure, with futures basis near 0% and depressed funding rates for perpetual contracts.”

On a more positive note, the mega liquidation event seen back in May helped clear out overleveraged traders, meaning “stronger-handed participants are the ones primarily contributing to current open interest levels.”

Dollar strength leads to BTC weakness

Another factor weighing on the price of Bitcoin has been the recent strength of the U.S. dollar, which has been on an uptrend since bottoming at 89.53 on May 25.

As seen in the chart above, a large inverse head and shoulders pattern has formed on the DXY chart with the neckline now being tested for the third time.

Should the dollar make another leg higher, the current economic recovery could be threatened as financial conditions would tighten and this might weigh heavily on many of the most popular trades of 2021.

Delphi Digital said:

“Commodities, gold, emerging market equities, Bitcoin are all vulnerable to a strengthening greenback, though the speed of its move also remains a critical factor.”

Bitcoin price falls to a long term support

While the 51% drop in BTC price has many analysts afraid that another multi-year bear market could be starting, it’s important to account for some of the larger macro trends that led to the current conditions.

The above chart shows that Bitcoin had six consecutive months of price gains before a downturn and the asset was due for a pullback from a historical perspective.

Even with BTC down 51% from its all-time high, on a year-over-year basis, its price is still 250% higher than its $9,100 valuation on July 16, 2020. 

The long-term uptrend for Bitcoin remains intact with its price currently testing the 12-month moving average, an important level of support that will determine where the price heads from here.

Bitcoin trading volume on spot and derivative exchanges is down and the prospects of a strengthening dollar weigh heavily on global financial markets. This has resulted in indecisiveness being the primary emotion that rules the crypto market at the moment and this sentiment is likely to persist until a major price movement or motivating event prompts engagement from sidelined traders.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph.com. Every investment and trading move involves risk, you should conduct your own research when making a decision.