The Reasons Behind the Crypto Market Crash: What Lies Ahead?
Just a week ago, the crypto market was abuzz with excitement as Bitcoin shattered its previous cycle's ATH, soaring to $73,500. However, this euphoria was abruptly curtailed, resulting in a significant reality check for many investors, with Bitcoin tumbling to nearly $60,000. Let's unpack the reasons behind this downturn and consider the potential market's direction.
Is This Just a Routine Correction?
Upon examining Bitcoin's chart, one might first consider a correction. It's a fundamental principle that robust, organic growth is punctuated by corrections: significant upsurges in cryptocurrency prices naturally lead to retracements.
In a bullish market, it's common for investors to secure profits (or minimize losses), opting not to hold their cryptocurrency for an extended period. This trend was evident once again, as analytics firm QryptoQuant highlighted substantial activity from short-term holders, those who had held BTC for less than five months. This pattern suggests a rush to cash in on paper profits following a series of lucrative digital investments.
Upon examining Bitcoin's chart, one might first consider a correction. It's a fundamental principle that robust, organic growth is punctuated by corrections: significant upsurges in cryptocurrency prices naturally lead to retracements.
In a bullish market, it's common for investors to secure profits (or minimize losses), opting not to hold their cryptocurrency for an extended period. This trend was evident once again, as analytics firm QryptoQuant highlighted substantial activity from short-term holders, those who had held BTC for less than five months. This pattern suggests a rush to cash in on paper profits following a series of lucrative digital investments.
However, the underlying reasons for Bitcoin's sudden drop of over 15% within a week delve deeper than surface-level market movements.
The Liquidation Wave
The market's overly optimistic sentiment led most cryptocurrency traders to adopt long positions. As a result, even minor fluctuations in price were enough to trigger numerous stop-loss orders or complete liquidations for those engaged in higher-risk trading. This resulted in a cascading effect of sales, propelling a rapid downward trend in prices. According to Coinglass, in just one day, traders saw over $650 million worth of positions liquidated!
Negative Trends in Spot Bitcoin ETFs
Recent data from SoSoValue reveals that since March 14, inflows into spot Bitcoin ETFs have steadily declined, turning negative by March 18. Although the outflow that day was exclusively from Grayscale Investments' GBTC, amounting to over $642 million, it significantly altered the market's momentum. Consequently, spot Bitcoin ETFs appeared to not only spur the market's explosive growth but also its steep downturn.
The Liquidation Wave
The market's overly optimistic sentiment led most cryptocurrency traders to adopt long positions. As a result, even minor fluctuations in price were enough to trigger numerous stop-loss orders or complete liquidations for those engaged in higher-risk trading. This resulted in a cascading effect of sales, propelling a rapid downward trend in prices. According to Coinglass, in just one day, traders saw over $650 million worth of positions liquidated!
Negative Trends in Spot Bitcoin ETFs
Recent data from SoSoValue reveals that since March 14, inflows into spot Bitcoin ETFs have steadily declined, turning negative by March 18. Although the outflow that day was exclusively from Grayscale Investments' GBTC, amounting to over $642 million, it significantly altered the market's momentum. Consequently, spot Bitcoin ETFs appeared to not only spur the market's explosive growth but also its steep downturn.
Spot Bitcoin ETF Inflow Chart Source: SoSoValue
Combating Inflation in the USA
The U.S. Federal Reserve seemed on the verge of cutting the interest rate, aiming for a target of 2%. However, according to the U.S. Bureau of Labor Statistics, inflation ceased its decline, lingering around the 3% mark in recent months.
Before the cryptocurrency market slump on March 12, it was reported that the U.S. Consumer Price Index had risen to 3.2%. While analysts had initially predicted the Fed might begin to lower the interest rate by May, such expectations are now likely postponed to summer. This shift prompted investors to dial back their eagerness for investments. The CME FedWatch Tool indicated that the probability of a US benchmark interest rate reduction in May stands at only 7.1% (as of this writing).
The U.S. Federal Reserve seemed on the verge of cutting the interest rate, aiming for a target of 2%. However, according to the U.S. Bureau of Labor Statistics, inflation ceased its decline, lingering around the 3% mark in recent months.
Before the cryptocurrency market slump on March 12, it was reported that the U.S. Consumer Price Index had risen to 3.2%. While analysts had initially predicted the Fed might begin to lower the interest rate by May, such expectations are now likely postponed to summer. This shift prompted investors to dial back their eagerness for investments. The CME FedWatch Tool indicated that the probability of a US benchmark interest rate reduction in May stands at only 7.1% (as of this writing).
Probabilities for the U.S. Interest Rate in May 2024 Source: cmegroup.com
Is the Bull Market Over?
It's too soon to say. The Bitcoin network is about a month away from its next halving. Historical trends from BTC's past four-year cycles suggest that global growth either begins or continues post-halving (if it hadn't started earlier, as seen this time). However, this doesn't exclude the possibility of corrections.
Looking ahead, the anticipated reduction in the Fed's interest rate is expected to enhance liquidity in both the monetary and cryptocurrency markets.
Nevertheless, numerous other factors, both predictable and not, could adversely affect cryptocurrencies. Hence, the certainty that the market will continue its ascent To The Moon remains elusive. It's crucial to conduct a thorough personal analysis and not solely rely on this article for making investment or trading decisions.
It's too soon to say. The Bitcoin network is about a month away from its next halving. Historical trends from BTC's past four-year cycles suggest that global growth either begins or continues post-halving (if it hadn't started earlier, as seen this time). However, this doesn't exclude the possibility of corrections.
Looking ahead, the anticipated reduction in the Fed's interest rate is expected to enhance liquidity in both the monetary and cryptocurrency markets.
Nevertheless, numerous other factors, both predictable and not, could adversely affect cryptocurrencies. Hence, the certainty that the market will continue its ascent To The Moon remains elusive. It's crucial to conduct a thorough personal analysis and not solely rely on this article for making investment or trading decisions.
Dmytro Psevdonimenko
Author
Has been exploring the enigmas of the crypto industry since 2017, transforming them into accessible narratives. Relies on dark chocolate and nuts as a secret source of energy and inspiration.
