The past few days have been rather tough in the cryptocurrency market. The total capitalization has dropped by around $360 billion since February 20th as the major coins take a beating.
Bitcoin’s price declined by about $13,000 since its all-time high, and in the past 24 hours alone, it lost around 15% of its dollar value.
With this in mind, we take a look at three possible reasons for this crash in BTC’s price.
Healthy Correction, Profit Taking
Right off the bat, it’s worth noting that the market was in a parabolic state before the most recent corrections. While the notion of “up only” does sound appealing, there are some considerations – after all, investors are bound to take some profits off the table at some point.
As CryptoPotato reported earlier this week, exchange inflows spiked by more than 1,000% prior to the dump on February 23rd. In other words, investors seemed to have been taking profits off their positions.
This is only natural, and it’s also healthy. What is more, it’s also important to realize that this bull run hasn’t really seen as many serious corrections compared to the one back in 2017. Then, the market saw at least 6 corrections with a magnitude of 30% or more, and so far, we haven’t even seen one.
Bitcoin has historically been a lot more volatile compared to traditional financial markets, and a 30% correction is to be expected at some point. It’s critical to remember that unrealized profits are not realized profits, and a rally like the one we’re having since late last year does increase the odds of people taking some money off the table, given the parabolic increase in Bitcoin’s price. After all, despite the recent correction, BTC is still up 300% since October.
Overly Leveraged Long Market – Long Squeeze
Another thing worth considering is that the market has been overly leveraged, with long positions taking the lion’s share. Data from Bitfinex, one of the leading cryptocurrency exchanges, shows that on February 21st, BTC longs peaked at around 29,000. The chart tells the story of what happened next:
As clearly seen above, there was a massive long squeeze, liquidating over 21% of the long positions. This triggers a cascading effect as the price keeps going through the liquidations at an accelerated rate.
Going forward, the funding rates on margin positions also went through the roof and was in desperate need of a reset. This also happened. Data from the popular analytics resource CryptoQuant reveals that the recent correction sent funding rates 30 days back, allowing more breathing room for leveraged investors going forward.
Wall Street Went Crashing – Bitcoin Correlated
Now, let’s take a look at the global macroeconomic picture. Zooming out of the cryptocurrency market reveals that it wasn’t the only one taking a beating.
A closer review of the performance of some of the major stock indices, such as the S&P 500, as well as the NASDAQ 100, shows a heavy correlation between the traditional financial markets and Bitcoin’s price.
As seen in the above chart, the prices of all three are moving in serious correlation and saw similar corrections over the past week.
However, it’s also true that correlation doesn’t always mean causation, but in the events of the last seven days, there’s merit to that notion. After all, Bitcoin remains a relatively risky play for most investors, and it makes sense to liquidate some profits to offset potential losses caused by the downturn of the traditional financial market.
This is especially true when Nasdaq went through the biggest slump since October 2020. This happened as government bond yields gave the market a jolt and investors favor companies that would benefit from a broader economic recovery throughout the year.
Rates matter. At 1.5%, the yield is comparable to S&P 500 dividend yield,” said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia. “And there’s no capital risk with a 10-year, you’ll get your principal back. All of a sudden it’s competitive with stocks.