The bitcoin rate has collapsed by 10% in a day, what will happen next?

The price of bitcoin on Sunday, April 18, dropped to $ 55,000, the drop per day was more than 10%. The previous rise in the price of the cryptocurrency took place against the background of waiting for the listing of the American exchange Coinbase on the Nasdaq trading platform.

Bitcoin began its correction on Wednesday, April 14, just after the ATH update. The fall gradually gained momentum and on the morning of Sunday, April 18, the price reached a steep peak. Within half an hour, the coin fell in price by more than $ 7000 and won back most of the losses in another half hour.

This movement is called flash crash, or «lightning crash.» This time it happened due to a combination of circumstances: low liquidity of the weekend, the market’s readiness for correction, unverified rumors about punitive measures by the US Treasury and the general negative of the week.

Let’s tell you more about what happened.

Tweet with unverified information

Early Sunday morning, the Twitter account FXHedge, which has almost 140,000 subscribers, published information that the US Treasury Department allegedly plans to impose sanctions on several financial institutions for money laundering using cryptocurrencies.

The posting of the tweet coincided with a flash crash in the market, so many market participants linked the two events with a cause-and-effect relationship. The tweet quickly spread across social media and created panic in the market. In the cryptocurrency environment, this phenomenon is called FUD (fear, uncertainty, doubt). At the time of writing, the tweet has over 4,000 retweets and almost 6,000 likes.

The veracity of information from anonymous sources, published by an anonymous account with a dubious reputation, raises many questions. According to Jake Chervinski, legal adviser to Compound Finance, the Ministry of Finance does not fine or punish anyone, the Ministry of Justice is engaged in this. In addition, all investigations into illegal activities among financial institutions are kept in the strictest confidence and such information is rarely made public.

I don’t find this credible. The tweet itself is fishy: Treasury doesn’t charge money laundering (DOJ does) a case against several FIs at once would be unusual. Also, criminal investigations are kept strictly confidential rarely leak. I’m not convinced by unnamed «sources.» 

– Jake Chervinsky (@jchervinsky) April 18, 2021

Nevertheless, such a tweet could indeed cause panic in the market.

Negative fundamental background

Several unfavorable events occurred during the week, which in themselves did not have a pronounced effect on the market, but created a snowball effect.

First, it became known that Turkey is preparing a ban on the use of cryptocurrencies as a means of payment. This news alarmed the cryptocurrency community, given that Turks are among the most active Bitcoin users.

Second, an accident at a coal mine in China’s Sichuan province triggered massive power outages. This led to a collapse in bitcoin hashrate as the region hosts the largest mining pools. According to CryptoQuant, at the time of writing, the hash rate has already dropped by 48%.

Thirdly, the popular P2P cryptocurrency exchange platform Localbitcoins began massively blocking user accounts on suspicion of money laundering or participation in illegal activities. These measures were perceived as another step towards tightening regulation in an industry that was originally conceived as a world free from control and supervision.

Low weekend liquidity

Finally, the decisive factor and trigger was the low liquidity typical of the weekend. Despite the fact that the cryptocurrency market is open 24 hours a day without holidays, weekends and lunch breaks, trading activity tends to drop on Saturday and Sunday. This is especially noticeable in the Asian session, when America has already gone to bed and Europe has not yet woken up. It is during these hours – called «twilight» in the foreign exchange market – that most flash crashes occur.

This is due to the fact that on low liquidity, a small effort is enough to trigger a cascade of stops and bring the market into a steep peak. The abundance of bots and algorithmic traders only enhances this dynamic.

What will happen next?

In the short term, Bitcoin is likely to continue to consolidate losses near current levels. The bulls will have to spend some time licking their wounds before they can muster up their strength and return BTC to an uptrend.

On-chain market positioning data from Intotheblock indicates that over 1 million coins were purchased at prices ranging from $ 55,000 to $ 59,800. This zone is forming a very tight resistance that will hold back the recovery of the first cryptocurrency.

On the other hand, the support looks less convincing, and a break below $ 54,000 (here is the breakeven point for 366k coins and they will try to protect it) could accelerate the fall to $ 50,000.

The bearish outlook is confirmed by the fall in the ratio of active addresses. It represents the percentage of active addresses relative to the total number of addresses on the network. Typically, this leading indicator helps identify reversals in the market as its peaks coincide with price peaks.

The chart shows that the ratio peaked on April 15 at 3.6%, and then plummeted downward. In the presence of confirming technical factors, this may indicate further development of the correction.

Over the long term, Bitcoin is still positive. This is evidenced by a number of technical and on-chain indicators. Perhaps this correction will reduce the degree of overheating in the market and help the market to continue its growth.

Sentiments of traders and investors

Coinbase’s entry to the stock market was the first major listing of a crypto exchange and attracted significant public attention with accompanying demand for the cryptocurrency, analyst Joseph Young notes. Nevertheless, the very moment of listing almost perfectly coincided with Bitcoin’s reaching a maximum of about $ 65,000, from which the price began to correct downward. Thus, the classic rule of financial markets «buy on the news, sell after the fact» worked.

In addition, high funding rates for traders wishing to take long margin positions on Bitcoin have become an important factor.

Together with strong technical resistance and a decrease in hype after the Coinbase listing, they helped the price of the cryptocurrency roll back to support of about $ 55,000. The current level remains important for the market, as it took bitcoin about a month to overcome it.

At the same time, cryptocurrency traders are in uncertainty as to where Bitcoin will head next. For example, analyst Kentering Clark, relying on the data of options trading, states that the market does not show clear preferences in favor of growth or decline.

“Options with strikes of around $ 50,000 and $ 80,000 are leading in terms of position volume. I think sellers will be happy, and I continue to believe that there will be a shift by the end of April or early May that will make holding long positions on bitcoin less preferable. No breakouts, just one range and rotation, ”he writes.

In the long term, traders remain optimistic. Thus, Crypto Capo notes that Bitcoin remains above the range, which began to form about three years ago.

“Bitcoin has broken out of a range that has been accumulating for more than a thousand days. This usually leads to a long duration. Currently, growth relative to the previous maximum is only 200%, ”he said.

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