Bitcoin, the flagship cryptocurrency, experienced a significant sell-off on December 11, with its price plummeting by nearly 7.5% to approximately $40,640. This drop in value can be attributed to a multitude of factors, one of which includes the cryptocurrency being overbought.
Bitcoin’s daily relative strength index (RSI) has remained above 70 since December 5, signaling an overvaluation. Historically, an overbought RSI often leads to the formation of local market tops as the influx of buyers decreases and sellers start dominating the market.
In addition to the RSI readings, on-chain indicators also suggest a saturation in upside momentum among traders. The net unrealized profit/loss (NUPL) indicator for Bitcoin, which gauges the ratio of investors generating profits, has soared above 0.5 for the first time since December 2021.
This implies that most Bitcoin investments are currently sitting on unrealized gains, thereby heightening the chances of profit-taking at the current market peaks.
Miners’ Movements and Market Liquidations
Another critical aspect influencing Bitcoin's price drop is the activity of Bitcoin miners.
Data tracked by CryptoQuant indicates a substantial decline in miners’ Bitcoin holdings, combined with an increase in the flow of BTC to crypto exchanges. This trend points towards miners either planning to or actively selling their holdings.
The upcoming halving event in 2024, which will slash miners' rewards by half, alongside rising competition evidenced by an increased hash rate, are likely prompting miners to strategize for stronger cash holdings. Moreover, the price decline aligns with the liquidation of $87 million worth of long positions in the BTC derivatives market, in stark contrast to the $9.91 million in short positions liquidations.
Such market dynamics, where a large volume of long positions is liquidated, results in the sale of substantial amounts of the asset. This can trigger stop-loss orders set by other long traders, leading to additional selling pressure and further driving down the price.
This combination of overbought conditions, on-chain indicators, miners’ actions, and derivatives market movements paints a comprehensive picture of the current state of Bitcoin and the factors contributing to its recent price volatility.