The Bitcoin market is experiencing a state of euphoria as prices approach the coveted $90,000 mark, but one prominent trading firm is sounding the alarm on a potential pullback and leverage washout that could catch bullish traders off guard.
QCP Capital Warns of Bitcoin Correction Risk
According to Singapore-based crypto trading firm QCP Capital, the recent Bitcoin breakthrough above key resistance levels has undoubtedly put the market in a state of euphoria. However, the firm cautioned that elevated perp funding rates and basis yields point to a potential flushing out of leverage.
While we remain structurally bullish, we are wary of any pullbacks, especially with a leverage washout.
– QCP Capital
The open interest-weighted average perp funding rates across exchanges have climbed to 0.056%, the highest since at least March, according to data from Coinglass. This suggests that long positions betting on upside are likely becoming overcrowded.
Leveraged Longs at Risk of Liquidation
A small price pullback could lead to leveraged bulls capitulating, closing out their long positions and unintentionally exacerbating the selling pressure in the market. Such leverage washouts were common occurrences during previous bull market runs, often resulting in sudden double-digit percentage price drops.
The elevated funding rate means that perpetual futures are trading at a premium to the spot price. Standard futures contracts are also trading at an annualized premium (basis) of over 15% across exchanges, including CME.
Cash and Carry Arbitrage Opportunity
The premium represents the yield available through a market-neutral cash and carry arbitrage strategy that involves buying the asset in the spot market and simultaneously selling a futures contract against it.
Historically, such sharp jumps in the so-called basis yield haven’t lasted very long, according to QCP Capital. This suggests that either the premium will fall or the spot price will play catch up to the futures, or a combination of both.
Market Optimism Abounds as BTC Soars
Bitcoin was trading around $88,300 at press time, representing a nearly 30% gain over the seven-day period based on CoinDesk data. Prices reached a high of $89,622 during overnight trading.
The price jump following Donald Trump’s victory in the U.S. presidential election held on Nov. 5 has instilled a firm belief among traders that the upward trend will continue. The optimism is reflected in the reaction on social media platform X whenever a potential resistance zone for BTC is mentioned.
While market participants are rejoicing in Bitcoin’s impressive rally, the euphoric sentiment and highly leveraged positions warrant caution. A sudden shakeout could catch many off guard, leading to a sharp correction before the uptrend potentially resumes.
As Bitcoin flirts with the psychologically significant $90,000 level, traders should keep a close eye on funding rates, open interest, and any signs of weakening bullish momentum. Managing risk and protecting gains will be crucial in navigating this exciting yet precarious phase of the Bitcoin market cycle.
