Bitcoin has been on a relentless rally, surging past the $64,000 mark, but some on-chain indicators are now suggesting that the digital asset may be overheating. Market intelligence firm CryptoQuant has issued a weekly report highlighting the rising traders’ unrealized profit margin and the high cost of opening new long positions in the perpetual futures markets as red flags for a possible pause or correction in Bitcoin’s price.
The recent bullish momentum in the market has propelled Bitcoin up by more than 25% since the beginning of the week, with the digital asset reaching levels not seen since November 2021. The surge in price has been driven by high demand from U.S. investors, as evidenced by the rise in the Coinbase premium index to 0.13%, the highest level since mid-February. Larger entities holding Bitcoin have also increased their positions to 3.975 million BTC, a level last witnessed in July 2022.
Despite the growing demand for Bitcoin, there are warning signs that a correction could be imminent. The short-term holder realized capitalization, a measure of fresh capital inflows into the Bitcoin market, has increased by 10% from October 2023. This surge in inflows now accounts for 35% of the total money invested in the network, indicating a potential risk for a market correction.
Resistance Levels and Price Valuation Bands
Bitcoin’s current price has surpassed $56,000, a previously identified short-term target based on network activity valuation. The price is now within the red Metcalfe Price Valuation Band, which has historically served as a resistance level in previous market cycles. Analysts suggest that a correction could occur around this price level, given the historical significance of the resistance band.
Warning Signs in Futures Markets and Miner Profitability
In addition to the market indicators signaling a potential correction, opening new long positions in the perpetual futures markets has become increasingly expensive. Traders’ unrealized profit margin is hovering at 32%, close to the 40% threshold that often triggers a price correction. Meanwhile, the Miner Profit/Loss Sustainability metric reveals that miners are still highly underpaid compared to historical levels, indicating that Bitcoin’s price may not be overheated from a miner profitability perspective.
While Bitcoin continues its upward trajectory driven by strong demand and capital inflows, investors should be wary of the warning signs pointing to a potential market correction. It is essential to monitor the on-chain indicators closely and exercise caution in light of the current market conditions.