On Monday morning, the entire near $400+ Billion markets of cryptocurrency responded negatively and started to fade into the darkness, with the largest of them all, Bitcoin (BTC) having a dramatic “flash crash” that sent it down by almost $4,000 in around two hours. This week’s price activity was the worst since the beginning of 2021. It occurred during the Asian Trading hours when price volatility is limited and revealed once again how fragile a Cryptocurrency Market is based on speculative trading using leverage to create artificially inflated prices.
In just about 60 minutes, approximately $400M in long leveraged positions were liquidated as a result of this movement on the BTC market according to The Kobeissi Letter. With prices dropping from a comfortable area of above $90,000 (Ath) to falling below $86,000 (Ath), the “Sunday Slam” caused some traders to wonder if this drop was just a quick dip prior to a rebound or if we were in for a much larger correction.
The “Sunday Slam”: Anatomy of a Crash
Traders noticed Bitcoin crashing through key support levels at an alarming pace, leading to chaos in the markets. In just 2 hours, Bitcoin fell nearly 5% from its peak value. The forced liquidation of $400 million in long positions due to the drop in price generated continued downward pressure on the asset, as all these over-leveraged traders had no choice but to sell their assets to cover their losses. This was a vicious cycle that continued.
According to a market analyst, “The price drop is the result of a cascade of leveraged unwinds occurring during thin weekend liquidity and there’s no change in fundamental demand.” The speed of the move, however, has created a psychological shock for the market, as the “Fear and Greed Index” fell from around 40 down to a score of 20, indicating an “Extreme Fear” index.
A “Toxic Mix” of Macro Headwinds
Although the immediate cause of the drop in price of bitcoin, as well as many other cryptocurrencies, was attributed to a significant amount of leveraged selling being done by speculators, there are many other fundamental factors that could cause people to want out of these assets. According to many analysts, the current circumstances surrounding digital currencies can be seen as the result of several key “toxic” headlines hitting traders at the beginning of December.
To start, extreme regulatory pressure being placed on stablecoins and virtual currencies has recently been placed on China due to the perceived risk of fraud and anonymity associated with them. The overwhelming size of China’s economy and its highly regulated economy means that any regulatory action taken by them has a considerable impact on markets involving digital currencies.
At the same time, traders are also beginning to feel nervous about possible interest rate increases by the Bank of Japan (BoJ). There is currently a 73% probability of an interest rate increase occurring within the next 30 days based upon the current interest rate swap market prices, which would strengthen the Yen and likely squeeze out some of the massive “carry trades” used to finance the increase in the prices of many of the crypto assets that we see today. Combined with rising U.S. jobless claims, the macro environment has shifted decidedly “risk-off.”
Altcoins Bleed as Bitcoin Stumbles
As is often the case, when Bitcoin sneezes, the rest of the market catches a cold. The carnage was not limited to the market leader; major altcoins suffered even steeper losses. Ethereum (ETH) dropped nearly 6% to trade below $2,900, while high-flyers like Solana (SOL), XRP, and Dogecoin saw declines ranging from 7% to 10%.
In just a few short hours, the crypto market lost around $140 billion of market cap as a result of the widespread downturn in equities. Retail investors who had entered into these higher-risk investments expecting a year-end rally have felt the greatest pain from this turn of events.
Technical Levels to Watch: $80,000 in Sight?
For people who study price patterns and trends, breaking through the support level of $90,000 is important. Now, attention has turned to the next levels of potential support. On an immediate basis, most market participants are watching for the level of $85,000 to act as support. If the $85,000 level fails to hold, then it allows the market to move down to the level of $80,000.
“We are closer to the end of the selling than the beginning, but markets are uncomfortable,” said Matthew Hougan, CIO at Bitwise Asset Management, in a recent note. He suggests that while the structural bull case remains intact—driven by institutional adoption and ETF flows—the short-term technicals suggest more pain could be in store before a bottom is found.
What’s Next? All Eyes on the Fed
As we look to the future, it seems likely that the direction of the market will ultimately be driven by events taking place within the United States. This week brings with it a multitude of key economic reports which will provide insight into the health of the U.S. economy, as well as give an indication of where the Federal Reserve may be headed.
On the minds of traders, is what comments will be made later today by Federal Reserve Chair Jerome Powell; many traders are eagerly anticipating his comments, as they could either help to ease some of the anxiety around trading in general, or they could further contribute to the current sell-off. If the Fed indicates a more dovish approach as it relates to the weakening labor data, this could very easily set up the risk asset class (such as Bitcoin) for a very quick “V-shaped” recovery. However, until this situation has played itself out, the lesson learned from the $400 million that was lost during the past week remains the same: in the high risk environment of cryptocurrencies, one cannot afford to ignore risk management; it is a matter of survival.
