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10 May 2021

Why Does Bitcoin’s Price Make Random, Sudden Downward Moves?

Why Does Bitcoin’s Price Make Random, Sudden Downward Moves?

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This strange phenomenon tends to confuse traditional commentators and journalists as they struggle to find any news piece that could have affected the price so drastically.

Although a small number of individuals may be placing buy or sell orders based on one-off news stories, they likely aren’t the sole driver of the sudden bitcoin price crashes that we regularly see.

In reality, many people retweeting and spreading the news that bitcoin’s price crashed because of X are simply being “Fooled by Randomness.”.

For example, a funding rate is charged that helps exchanges to keep the perpetual swap price in line with the spot price.

If there are too many leveraged longs on bitcoin without simultaneous buying pressure in the spot market, the current price may temporarily be unsustainable.

Some may ask, if excess leverage is a key reason why these sudden downward price moves occur, how can the futures curve contango be good for Bitcoin, especially if the curve is driven by the demand to place leveraged long bitcoin purchases.

With that said, if the curve gets too high without enough capital coming in to execute the basis trade or buy spot, the contango/funding rate could get unsustainably high

If the funding rate or contango curve gets too high without significant buying pressure in the spot market driving up the price, then the price could be driven up on a fragile base of leveraged longs paying high funding rates

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