Bitcoin (BTC) analyst Willy Woo has sounded the alarm on a significant challenge that could hinder the future growth of the world’s leading cryptocurrency. In a recent revelation on the social media platform X, Woo highlighted a concerning obstacle that could hinder its potential for future growth.
Woo’s analysis focused on the growing dominance of Bitcoin derivatives, often referred to as “paper” coin, and its implications for the cryptocurrency’s liquidity and price stability.
Rise Of Bitcoin Derivatives Threatens Liquidity
According to Woo, this surge in BTC derivatives trading is gradually siphoning liquidity away from the actual coins. He emphasized the ratio between the combined futures open value of derivatives and the highly liquid real crypto that is actively traded.
Woo expressed his concern, writing, “We are now in a regime of 20-30% more BTC being traded through derivatives than the actual liquid BTC. This counteracts a bullish supply shock.”
This is a slide from my TOKEN2049 talk. It’s the ratio of “paper BTC” (combined futures open value) that’s traded vs the real BTC that is highly liquid and traded. We are now in a regime of 20-30% more BTC being traded. This counteracts a bullish supply shock. pic.twitter.com/fnCHPFXAfC
— Willy Woo (@woonomic) September 20, 2023
In essence, the proliferation of BTC derivatives allows for increased price manipulation and potentially weaker price rallies, as the market is flooded with derivative-based trading rather than genuine transactions.
Woo further elaborated on the adverse effects of this trend, pointing out that the abundance and accessibility of US dollars (USD) compared to Bitcoin make it possible for larger players to exert inorganic sell pressure on Bitcoin through the futures and derivatives markets.
This inorganic pressure, according to Woo, acts as an impediment to Bitcoin’s organic growth and is responsible for the diminished intensity of recent price rallies when compared to Bitcoin’s early days.
Bitcoin approaches the $25K level. Chart: TradingView.com
Bitcoin Dominance Surges
In a separate report, Bitcoin’s dominance in the cryptocurrency market has surged to its highest level this year.
Rising Bitcoin dominance often mean that investors are favoring Bitcoin over other alternative cryptocurrencies, or altcoins. This shift in investor sentiment toward Bitcoin can be attributed to various factors, including its established reputation, recognition as a store of value, and perceived lower risk compared to many altcoins.
Source: iStock
However, it’s crucial to note that high Bitcoin dominance can signal a period of stagnation or decline for altcoins. As investors allocate more capital to Bitcoin, they may withdraw funds from altcoins, potentially leading to price drops in the alternative cryptocurrency market.
Woo’s warning about the growing dominance of Bitcoin derivatives serves as a reminder of the challenges facing the cryptocurrency ecosystem. While Bitcoin’s rising dominance reflects its continued appeal to investors, it also underscores the need for a balanced and sustainable cryptocurrency market that fosters innovation while maintaining the integrity and stability of the original cryptocurrency, Bitcoin.
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