Why bitcoin crashed
By Paul Muir
After soaring close to its all-time high of nearly $20,000, bitcoin crashed on Wednesday and Thursday to just over $16,300, predictably taking the altcoins down with it, before rising back above $17,000.
According to a Coindesk report, the three main factors that have contributed to the price plunge are:
“Bitcoin (BTC, -14.06%) has fallen victim to a large unwinding of leverage trades in derivatives listed across major exchanges,” Matthew Dibb, CEO of Stack Funds, told CoinDesk.
Nearly $2 billion-worth of derivative positions have been liquidated in the past 24 hours. Of that, more than $1.6 billion-worth has been closed in the past 12 hours, according to data source Bybit.
The unwinding of leverage trades had been expected, as the cost of holding long positions in the perpetual futures market, also known as the funding rate, had risen sharply to a multi-month high of 0.098% in the past few days – a sign of overleveraging, or overheating, in the market. The funding rate is decided and paid every eight hours.
With the price drop, the funding rate has fallen back to 0.011%, according to data source Glassnode. In effect, excess leverage has been crowded out.
Bitcoin’s rally from $10,000 to $19,400 seen over the past seven weeks looked overstretched on the technical charts.
The momentum was so strong that the cryptocurrency consistently traded above its 10-day moving average (MA) throughout the ascent, despite an overbought reading on the 14-day relative strength index (RSI).
Assets seldom see a 90-degree rally, as speculators tend to book profits at regular intervals, pushing prices down to their short-term moving averages. The cryptocurrency has seen several pullbacks of 20% or more during the previous bull markets.
The price drop seen today has taken the cryptocurrency well below its 10-day average and allowed the RSI to realign in a more bull friendly-manner. “It’s a healthy pullback,” Stack Funds’ Dibb said.
According to chart analysts, price rallies with regular pullbacks are more sustainable than the near-90 degree ascents.
Some traders had positioned for the pullback by buying put options, or bearish bets, as noted by Deribit Insights.
Other factors amplified sell-off
According to trader and analyst Alex Kruger, Coinbase CEO Brian Armstrong’s tweet thread about the US Treasury Department’s rumored plans to track owners of self-hosted cryptocurrency wallets weakened the bullish move, allowing a price pullback.
“This [regulatory concerns], against a backdrop of euphoria and unsustainable high leverage among longs led to the largest 24-hour drop since March,” Kruger told CoinDesk in a Telegram chat.
“However, if what Armstrong talked about comes to be, it would be extremely bearish. As of now, I see that as highly unlikely (in the short-term),” Kruger said.
The downward move may also have been amplified by prominent cryptocurrency exchange OKEX’s announcement it would resume withdrawals.
“Most of the frozen bitcoin [on OKEx] had traded up around 70%, so there were a lot of unrealized profits locked up there,” Sui Chung, CEO of CF Benchmarks, said in a statement provided to CoinDesk. “Once these coins were free to move, it’s likely many traders sold them for dollars and stablecoins to realize those gains, adding greater momentum to the selling.”
Should investors be worried?
Crypto analysts were quick to reassure newbie investors that scary corrections are par for the course in the nascent sector, pointing to a series of much steeper price dives during previous bull runs.
YouTuber Lark Davis tweeted, “Bitcoin regularly has big dips in a bull market, DON’T PANIC!”
Morgan Creek Capital’s Anthony Pompliano advised people to treat the correction as an opportunity to accumulate: “I bought more bitcoin last night. I bought more bitcoin this morning. Dollar cost averaging and multi-year time horizons allow you to view price decreases as opportunities to buy a great asset on sale.”
Dan Held of the Kraken exchange was more succinct: “Don’t worry about the dip. HODL”
Whether bitcoin will resume its ascent or fall further remains to be seen.
Referring to a Coinbase chart, Lark Davis tweeted: “#bitcoin 17% pull back, found support for 4 hour closes at line of support at $16,500. Was this the dip? Or are we going lower?”
Why bitcoin crashed