Bitcoin’s Overnight Drop to $55K Highlights Market Complexities

Bitcoin (BTC) saw a significant drop overnight, descending to $55,000 as it moved to correct a spike observed on July 5th, which saw prices oscillate between $53,300 and $56,700. Noted analyst Willy Woo has presented findings that suggest the derivatives market is heavily influenced by “paper BTC,” a term he uses to describe Bitcoin that is backed by stablecoins rather than actual BTC, leading to substantial resistance against Bitcoin’s price appreciation.

Theoretically, because the supply of U.S. dollars is unlimited, the supply of “paper BTC” can also be unlimited. This situation diverts significant buying power towards acquiring synthetic BTC rather than real BTC, stifling genuine market growth. Woo’s analysis indicates that a primary factor behind the recent decline from $72,000 to $53,000 was the massive short selling of “paper BTC.”

According to Willy Woo’s data:

The German government sold only 9,332 real BTC.
Since the peak at $72,000, up to 170,000 “paper BTC” have been created and sold.
Woo advises those seeking to leverage Bitcoin to avoid the derivatives market and instead purchase real BTC using stablecoins. He provides two main reasons for this strategy:

Using dollar collateral to buy futures increases the synthetic BTC supply, creating a bearish environment.
Buying real BTC with margin funds creates a supply shortage, fostering a bullish market.
Additionally, financing long positions with borrowed dollars or USDT in a bull market is cheaper than using futures or perpetual contracts.

In essence:

Purchasing real BTC means only actual BTC holders can sell to you.
Purchasing futures allows any dollar holder to sell to you.
The second scenario introduces potentially infinite selling pressure due to the limitless nature of dollar supply.

Nevertheless, there are dissenting opinions. One notable argument suggests that market makers (MMs) will purchase more real BTC when there is a net long exposure in futures, effectively converting long exposure into the underlying asset. This view asserts that BTC’s price drop is due to BTC being sold by original holders and miners more than it is bought, not because of synthetic BTC.

Further, new investors in the BTC market, more interested in dollar returns than long-term BTC holdings, sell BTC to meet financial obligations, contributing to market pressure. Willy Woo counters by emphasizing that the described scenario is just a small part of a larger system. He highlights that directional traders can sell BTC without owning it by using dollar collateral, and presents data to show the significant impact of this mechanism on the market.

Woo also notes that the 2021 bull market was unique for not reaching the explosive highs seen in previous cycles, attributing this to the rise of “paper BTC.” Unlike in earlier years, when only BTC holders could sell, the introduction of synthetic BTC allowed for greater selling pressure, limiting market gains.

Despite these differences, both sides agree that some of the new investments in the BTC market have shifted to the derivatives market, reducing purchasing power in the spot market. While this has tempered the dramatic price surges typically seen during bull markets, it has also increased market liquidity.