Ethereum has fallen by more than 7% in the last several hours, a day after breaking its ETH/USD all-time high from three years ago.
Bitcoin price slid to as low as $34,000 on Binance, recording a 10% drop since yesterday’s peak.
Why did Ether price drop particularly hard?
Ether has outperformed Bitcoin so far in January, as Cointelegraph previously reported. As Bitcoin started to consolidate with low volume, the demand for higher-risk plays rose.
The altcoin market saw a massive rally when BTC began to consolidate and range between $40,000 and $36,000. Traders rushed to altcoins that have much lower liquidity and volume compared with BTC.
But when Bitcoin began to see its first real short-term sentiment shift, altcoins saw an intense pullback against both Bitcoin and the U.S. dollar.
The strong drop of Ether was unexpected because of its strong momentum in the past 72 hours. ETH was consistently outperforming BTC on the ETH/BTC pair, demonstrating strength against the rest of the cryptocurrency market and breaking its all-time high.
Neko, a cryptocurrency trader, said prior to the drop when ETH was resilient against Bitcoin:
“I’m honestly loving how well $ETH is holding up in this climate. The BTC pair has been holding steady, which in turns gives the USDT pairing very minimal downside. We are still trading at 1350s near ATHs despite this 3000+ point drop on $BTC. Absolutely incredible.”
There are two reasons why ETH saw a large drop on the day. First, the Ether futures market was extremely overheated. The funding rate hovered at around 0.3% on Jan. 19, which is 30 times the average 0.01%.
Second, as reported by Deribi — the top cryptocurrency options exchange — the open interest of Ether hit an all-time high.
— Deribit (@DeribitExchange) January 20, 2021
The combination of an overcrowded options market and an overheated futures market could cause the market to wind down, resulting in mass liquidations. Deribit analysts wrote:
“Deribit $ETH option open interest hits an all-time high of $1.8B notional, which is 89% of the total ETH Options market.”
What happens next?
The market is showing peak uncertainty as traders generally use less leverage across major exchanges.
Hence, the short-term trajectory of Ether will mostly depend on the performance of Bitcoin in the next 24 hours. Moreover, the ETH/BTC pair is at an important resistance level of 0.038, which was the previous local top in September 2020.
But if Bitcoin drops below $34,000, Ether and the entire altcoin market will likely see a major correction, considering that most of the altcoins are in overbought territory.
However, if Bitcoin rebounds from $34,000 to test new highs, then ETH will likely recover strongly alongside Bitcoin and other large-market-cap cryptocurrencies.