Fuel for a broader Bitcoin rally? BTC dip fills futures gap, liquidating $1 billion

Published at: Feb. 22, 2021

An important Chicago Mercantile Exchange Bitcoin (BTC) futures gap closed as BTC/USD suddenly dropped below $54,000 on Feb. 22.

A CME gap forms when the price of Bitcoin moves either up or down after the CME closes during the weekend or holidays in the United States.

Unlike most cryptocurrency exchanges, because the CME Bitcoin futures exchange is not open at all times, a gap forms between CME and many Bitcoin trading platforms.

Why is the CME Bitcoin gap significant?

The CME gap is sometimes considered an important gap to fill for the Bitcoin rally to continue in the near term.

For instance, the latest gap formed when the price of Bitcoin exceeded $58,000 across major cryptocurrency exchanges, while CME's Bitcoin futures market closed for two days.

As such, a gap at $55,504 emerged, which closed as the price of Bitcoin fell steeply after the new weekly candle opened.

#Bitcoin CME gap closed finally. https://t.co/JygwzJwClk pic.twitter.com/XYkPgKuBjp

— Fomocap trades (@Workedia) February 22, 2021

Bitcoin has a tendency to sharply correct in a short period after a new weekly candle opens. This flushes out overleveraged longs and brings some balance into the market.

Prior to the weekly candle open, the funding rate of the Bitcoin futures market ranged between 0.1% to 0.15%. This is 10-fold to 15-fold higher than the default 0.01% funding rate.

Although the funding rate of Bitcoin has remained relatively high throughout the bull cycle, a 0.15% funding rate indicates that the market is extremely overcrowded.

The combination of a high Bitcoin futures funding rate, the presence of a CME gap and whales depositing to major U.S. exchanges likely fueled the drop.

Large deposits spotted on Gemini

Prior to the pullback, CryptoQuant found that large BTC deposits were transferred to Gemini, one of the leading U.S. cryptocurrency exchanges.

Before the dip, there were significant $BTC inflows into all exchanges, mostly Gemini.Chart https://t.co/6gPk3Qbg6j pic.twitter.com/j1wDNtqNak

— CryptoQuant.com (@cryptoquant_com) February 22, 2021

When whales deposit BTC into exchanges, it typically signals an intent to sell. Hence, it is likely that some whales took profit on their positions, causing the market to dip sharply in a short period.

However, whales selling large amounts of Bitcoin can cause a bigger correction than usual because it leads to cascading liquidations in the futures market.

Many overleveraged longs can get liquidated consecutively, amplifying the effect of the whale-induced sell-off. Data shows that over $1 billion worth of futures contracts were liquidated in the last 24 hours.

After the drop, traders are anticipating a gradual recovery. Scott Melker, a cryptocurrency trader and technical analyst, said that recent history indicates dips do not last long. He wrote:

"I have no idea what happens here, but recent history shows that dips have not lasted long. Would love to see another slow float back up after this bit of selling. Of course we could drop, but each move like this of late has been a buying opportunity."
Tags
Cme
Related Posts
Here’s what would happen to Bitcoin if the government tried to take it over
On June 7, the United States government task force seized more than $2 million in Bitcoin (BTC) to pay a ransom following an attack on the Colonial Pipeline system. A warrant filed with the U.S. District Court for the Northern District of California shows that authorities recovered 63.7 BTC. As news of the recovery spread through mainstream media, some outlets suggested that the U.S. government somehow hacked the Bitcoin address in order to extract the funds. For example, University of Michigan professor and New York Times contributor Justin Wolfers tweeted: News that the government has figured out how to snatch …
Bitcoin / June 9, 2021
Study finds CME drives Bitcoin price, but it excludes stablecoin volumes
On Oct. 14, Wilshire Phoenix investment firm released its Efficient Price Discovery report, which detailed how CME Bitcoin (BTC) futures impact Bitcoin price discovery. The firm concluded that "CME Bitcoin futures contribute more to price discovery than its related spot markets." And the researchers also suggested that: "CME Bitcoin futures have grown to become significant, this is not only demonstrated through trading volume and open interest, but also by influence on spot price formation." Wilshire's analysis correctly states that price discovery in traditional markets is a contested topic. The report also adds that studies on price formation often find that …
Bitcoin / Oct. 20, 2020
Rising Bitcoin futures funding rate signals traders expect $50,000 BTC
Today Bitcoin (BTC) price rallied to a new all-time high at $44,900 shortly after Tesla announced a $1.5 billion investment. This event triggered $555 million worth of shorts to be liquidated in two hours and it happened as Bitcoin futures open interest reached $13.7 billion, which is just 3% below its historical high. These price moves drastically increased the cost of carrying long positions, mainly for those using perpetual futures. This indicator raised a yellow flag on how leveraged those investors are and their potential price impact. As shown adove, the aggregate BTC futures open interest just reached a $15 …
Bitcoin / Feb. 8, 2021
Bitcoin price returns to troubled waters hours after Elon Musk’s BTC tweet
When Bitcoin's (BTC) price dropped 10% to $29,150 on Jan. 27, something unusual happened with the Chicago Mercantile Exchange (CME) BTC futures contracts. As the price fell, these CME Bitcoin futures traded at a 1% discount to Coinbase, which signaled a disarrangement between both markets. Good morning. Bitcoin spot has almost full retraced the weekly. CME bitcoin futs are both backwardian and expire Friday. That is all. — i.am.nomad (@IamNomad) January 27, 2021 Immediately, traders suggested that futures contracts, which were set to expire in 48-hours, were responsible for the price dump. Now, before rushing to quick conclusions, one should …
Bitcoin / Jan. 29, 2021
High priced $32K Bitcoin options show some pro traders expect more upside
A month ago, one would be hard pressed to find any investor who would have expected a $32,000 Bitcoin (BTC) price for January. At the time, a 140% upside was needed from the $13,300 price on Oct. 30 and this seemed quite far fetched. Therefore, the January $32,000 BTC call (buy) options traded at Deribit for a meager $67, or 0.005 BTC in late October. Fast forward to now, and the same call option peaked at $705. That’s an almost 10x gain in less than four weeks. Keep in mind that despite the rally to $19,484, an additional 67% upside …
Bitcoin / Nov. 29, 2020