With Bitcoin [BTC] edging closer to the $100,000 milestone, concerns have been raised regarding the sustainability of its current surge.
While investor sentiment remains positive, various market indicators are suggesting that a degree of caution may be necessary.
Therefore, CryptoCrypto has conducted an analysis of three crucial areas to determine whether Bitcoin is on the verge of overheating.
Bitcoin’s Price Momentum and Overextended Conditions
Observing the daily BTC/USD chart, it is evident that Bitcoin has experienced a sharp upward trajectory, breaking out from consolidation around $65,000 just a few weeks back.
The Relative Strength Index (RSI) currently stands at 78.6, indicating that Bitcoin has entered overextended territory. Historically, RSI levels surpassing 70 have often been followed by short-term corrections as traders take profits.
Furthermore, the Bollinger Bands indicate that the price is hovering near the upper limit, suggesting heightened volatility.
With the 20-day moving average significantly trailing behind the spot price, a potential mean reversion could be looming, particularly if profit-taking intensifies.
At the time of writing, BTC was trading at approximately $98,200, marking a slight uptick from the $97,000 range it dipped to during the previous trading session.
Bitcoin SOPR Indicates Profit-Taking
Examining the Spent Output Profit Ratio (SOPR) chart provides further insight into market dynamics. SOPR, which gauges whether on-chain transferred coins are in profit, has shown a consistent rise alongside Bitcoin’s price surge.
According to CryptoCrypto’s analysis, SOPR values climbed to around 1.08 over the past week, indicating heightened levels of realized profits.
Traditionally, such elevated SOPR levels often align with local peaks, signifying increased profit realization by investors during bullish phases.
A sudden decline in SOPR could indicate a rise in selling pressure, potentially triggering a broader market correction. As of now, the spike has slightly receded, with BTC SOPR hovering around 1.04.
An Overextended Market
Another concerning signal arises from the Bitcoin Funding Rates chart, which illustrates a notable uptrend across major exchanges.
When Funding Rates are positive, it indicates a dominance of long positions in the market, with excessively high rates pointing towards over-leveraging.
Currently, at the time of publication, Funding Rates are nearing levels last witnessed during the peak of the 2021 bull market, implying that speculative fervor may be reaching excessive levels.
In the event of a market correction, overleveraged positions could potentially amplify the sell-off through liquidations, exerting downward pressure.
A Market Correction Preceding Sustainable Trends?
While Bitcoin’s recent price surge has undoubtedly made history, the convergence of overextended RSI levels, elevated SOPR values, and climbing Funding Rates indicates a possible overheating scenario.
A healthy correction could offer a reset to the market, creating a foundation for sustainable growth rather than speculative frenzy.
Although Bitcoin may continue its upward trajectory, the risks associated with its rapid incline should not be overlooked.