3 Reasons Why Bitcoin Price Crashed by More Than $11,000
Bitcoin suffered a major price crash during the weekend and on Monday after securing a milestone high of $41,986.
The flagship cryptocurrency shed more than $11,000, or roughly 29 percent, in just three days of trading to hit a session low just shy of $30,000. Its plunge also trimmed roughly $205 billion off its market capitalization, confirming its worst performance since March.
Bitcoin’s sudden decline shocked traders who anticipated its bull run to head higher against favorable macroeconomic conditions (read here). Meanwhile, many analysts agreed that the cryptocurrency was due for a downside correction after surging relentlessly in the last nine months—logging more than 900 percent in gains from its mid-March nadir of $3,858.
Nevertheless, more catalysts were at play during the Bitcoin price crash. Here are three primary factors responsible for its latest decline.
#1 Stimulus Hopes (A Short-term Shock)
Stimulus packages raise the prospects of a decline in the US dollar market.
At least that is the narrative that Bitcoin bulls adopted in 2020 when the cryptocurrency exploded higher against a depreciating greenback. And after a Democratic sweep in the hotly contested Georgia Senate run-off elections last week, Wall Street professionals expect that it will raise President Joe Biden’s prospect of passing at least $1 trillion worth of additional fiscal aid.
Nevertheless, Bitcoin’s promising bullish fundamental fizzled as it instead helped the US dollar index rebound. The greenback surged by up to 1.70 percent against a basket of foreign currencies after displaying signs of bottoming out near 89.20. Analysts at Goldman Sachs called it a “crowded USD sentiment,” led by a rise in the long-term US Treasury bonds’ yields.
“These two forces have the power to dispel a widespread USD-negative assumption of low US yields,” they said. “With focus shifting to new fiscal policies in the US, we think both US real yields and the US dollar are in a bottoming process.”
The reason why yields surged this week and led the dollar value higher is as follows.
#2 Taper Tantrum
“A taper tantrum is now a real risk,” Aneta Markowska, an economist at Jefferies, warned as the Federal Reserve unveiled the minutes of its December meeting last Wednesday.
The alert appeared as the US central bank discussed the prospects of limiting its dovish approach against a brightening economic outlook led by the Democrat stimulus (and it has an impact on the Bitcoin market).
The Fed currently purchases about $80 billion worth of Treasury debt and $40 billion in mortgage-backed securities every month. Its minutes showed a potential ramping up of the large-scale bond-buying program. The speculation effectively sent the prices of the 10-year US Treasury note and 30-year US Treasury bond lower. That, in turn, raised the yields.
“We assume an additional $1 trillion of stimulus in the next few months, which will add roughly two percentage points to growth over the next two years. This will close the output gap roughly 4-6 quarters “ahead of schedule,” pulling forward the Fed liftoff from 2024 to early 2023.”
Bitcoin suffered in response. The cryptocurrency promised to become an alternative asset in an average 60/40 investment portfolio—denoting 60 percent allocation to riskier stocks and 40 percent allocation to risk-off bonds—as the two ducked their inverse correlation in the aftermath of March’s global market rout.
But now, with bond prices falling and yields rising, traders rolled back a portion of their portfolio risks back into the US Treasurys for safer returns. That also made the US dollar an attractive asset for foreign investors, which may have influenced them to transfer some of their Bitcoin profits to the US bond market.
#3 Bitcoin Overbought Sentiments
Bitcoin sprinted from as low as $18,000 to above $41,000 in just two months of trading.
Meanwhile, the cryptocurrency corrected only by modest margins, prompting traders to refill their bags near local lows and continue the rally higher. As a result, readings on its Relative Strength Indicator, a technical indicator that measures an asset’s speed and price change, returned a peaking overbought signal.
Overheated RSIs typically prompt deeper price corrections in the Bitcoin market. It is possible that traders merely used the top to secure profits, which turned the bullish tides in the futures market as well, causing a long squeeze. Meanwhile, it also raised the prospects of traders buying Bitcoin as it locates a local bottom.
Published at Tue, 12 Jan 2021 06:46:57 +0000 3 Reasons Why Bitcoin Price Crashed by More Than $11,000