With Bitcoin [BTC] edging closer to the $100,000 mark, there are growing concerns about the sustainability of its current surge.
Amidst rising investor excitement, multiple market signals are pointing towards the need for caution.
Therefore, CryptoCrypto has evaluated three key areas to assess whether Bitcoin is on the brink of overheating.
Bitcoin’s Price Momentum and Overbought Circumstances
The daily BTC/USD chart displays Bitcoin’s swift upward movement as the dominant coin broke out of consolidation around $65,000 only a few weeks back.
The Relative Strength Index (RSI) stands at 78.6, indicating Bitcoin’s entry into overbought territory. Typically, RSI levels exceeding 70 often precede short-term corrections, driven by traders locking in their profits.
Besides, the Bollinger Bands exhibit the price hovering near the upper threshold, suggesting heightened volatility.
Given the noticeable lag of the 20-day moving average behind the spot price, a potential mean reversion might be imminent, particularly if profit-taking gains momentum.
At present, BTC is trading at approximately $98,200, slightly up from the $97,000 range it touched in the recent trading session.
Bitcoin’s SOPR Indicates Profit-Taking
The Spent Output Profit Ratio (SOPR) chart provides a clear insight into market sentiments. SOPR, measuring the profitability of on-chain coin movements, has consistently risen alongside Bitcoin’s price.
Analysis by CryptoCrypto indicates that SOPR values surged to nearly 1.08 in the prior week, reflecting increased levels of realized profits.
Typically, such heightened SOPR values often align with local peaks, as investors begin cashing out amidst bullish exuberance.
A sudden drop in SOPR would signify intensified selling pressure, possibly triggering a broader correction. Currently, the spike has slightly declined, with BTC’s SOPR standing around 1.04.
An Excessively Leveraged Market
Another warning sign emerges from the Bitcoin Funding Rates chart, displaying a notable uptick across prominent exchanges.
Funding Rates turn positive when long positions dominate the market, and excessively high rates indicate considerable leverage.
At present, Funding Rates are nearing levels last witnessed during the peak of the 2021 bull market, suggesting an overabundance of speculative enthusiasm.
If a correction materializes, overleveraged positions would likely amplify the sell-off through liquidations, adding further downward pressure.
Is a Market Reset Needed for Stable Trends?
Although Bitcoin’s surge is undeniably noteworthy, the convergence of overbought RSI levels, elevated SOPR values, and surging Funding Rates signals a potential overheating scenario.
A healthy correction could potentially recalibrate the market, setting the stage for sustainable growth over speculative fervor.
While Bitcoin might sustain its upward trajectory, the risks associated with its swift climb cannot be overlooked.