What are the reasons for the unexpected growth of BTC to $25k, and why was this rally false?

Bitcoin experienced an explosive price movement in recent days, pushing its price up 11% overnight. But Bitcoin has been unable to hold above $25,000 — the price has fallen back to $23,600 by now. Why this rapid growth of the cryptocurrency occurred and why the current temporary pullback is inevitable is discussed in this analytical article.

 

Reason 1: Running away from stablecoins

The recent SEC attack on BUSD, followed by a wave of negative rumors about USDC, caused investors in these assets to flee urgently for fear of being frozen or blocked.

So in the last couple of days, the capitalization of BUSD has fallen by almost $1.5 billion. It is impossible to quickly convert such amounts into fiat, so most chose to flee to Bitcoin as the most reliable and most liquid of crypto-assets.

CryptoQuant analysts fully confirm this logic, stating a significant decrease of BTC reserves on Binance at the moment of price growth. On-chain data shows that about 3500 BTC were withdrawn from Binance by users after the conflict situation with BUSD and SEC.

The same panic arose on the side of USDC, where investors fled under the pressure of negative rumors.

From open sources, it was found that $1.6 billion was withdrawn from USDC over two days. Almost all of these assets were used to buy the pair BTC/ETH. User @lookonchain very convincingly shows the correlation between the withdrawal of these stablecoins to the exchange as well as the simultaneous Bitcoin price pump.

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Another mysterious fund “0x3356” withdrew 953.6M $USDC from #Circle and transferred to exchanges.

It seems that today's rise in $BTC prices has something to do with this fund.https://t.co/pqYQw3sUOX pic.twitter.com/Vuxt5iv5cP

— Lookonchain (@lookonchain) February 16, 2023

The flow of USDC withdrawals was so strong that according to @PeckShieldAlert, Binance US was forced to temporarily suspend USDC withdrawals due to a lack of liquidity. Much of this flow from stablecoins created the strongest demand for Bitcoin and Ethereum, which caused their prices to pump.

The reason 2: The liquidation flow

Seeing such a rapid rush in the market, many traders logically assumed the temporary nature of the growth and the soon-to-follow rollback of the price (which usually follows after testing a new price level). Therefore, around $24,000, they decided to start shorting Bitcoin, expecting a pullback soon.

But the growth momentum was stronger than traders expected, and the price continued to rise. What followed was a classic avalanche of liquidations of downside bets. The volume of liquidations on February 16, the moment of the final growth impulse, was almost $200 million.

This liquidation cascade effect is well known — the forced closing of traders’ positions causes the exchange to buy back the asset (which the trader unsuccessfully decided to short) on the open market. Thus, mass liquidations push the price of the asset even higher, causing a new wave of liquidations that eventually brought the Bitcoin price to above $25,200, according to Binance.

What we think about it

This kind of growth effect on liquidations always has a short-term nature; in addition, today, the flow of negativity from BUSD/USDC has almost stopped because the situation has cleared up. So, both factors suddenly stopped working, and all this led to a sudden pullback of the Bitcoin price by almost $1500 in just a couple of hours.

Interesting how the BTC pump mirrored massive BUSD redemptions from Binance.

Stopped at 8pm when a WSJ 'resolution' article dropped.

Maybe partly triggered by a stablecoin panic where BTC was an escape hatch. NDX boosted the second leg. https://t.co/d5kftbsAvz pic.twitter.com/Zf190ZvhCZ

— Truthiness (@newtruthiness) February 16, 2023

Notice the complete irrationality of such a growth from the fundamental analysis point of view — there is no big positive event for such a rally, which is typical for a false growth (usually ending in a bull trap). Therefore, the rapid rise was followed by an equally rapid reversal to the original price level, which is typical of a false rise.

When trying to bet on a rise or fall in price, it is always important to see the fundamental reasons behind it. Most often, such an irrational rapid rise is indicative of market manipulation, panic, or a confluence of random circumstances, which cannot be the basis for long-term healthy growth.