Bitcoin: factors that led to sharp price drop

Bitcoin: factors that led to sharp price drop

The cryptocurrency market has fallen again. Digital assets were not the only ones to suffer during the fall. The traditional stock market has also contributed. The broader Wall Street index, the S&P 500, fell 2.12% to 4,380.26 points. The technology-heavy Nasdaq index fell 2.88% to 13,716.71 points. The Dow Jones, in turn, fell by 1.78% and closed at 34,312.03 points.

Earlier in the day, European indices lost several points due to expectations of volatility in the US market. The main index of the Paris Stock Exchange, the CAC 40, fell by 0.26% to 6,946.82 points. The German index of the Frankfurt Stock Exchange, the DAX 30, lost 0.67% and ended the session at 15,267.63 points.

S&P 500 Source: ecoinometrics
S&P 500 Source: ecoinometrics

Rising rates: “black angel” leans towards risky assets

There is no denying that investors knew that central banks would pursue aggressive monetary policy this year to contain inflation. Although it is worth noting that we are not talking about hyperinflation, the level or rate of price growth is still a concern. The US economy has not been in such an inflationary situation for 40 years. With CPI growth of more than 7%, the Fed is well behind the 2% target. Other OECD countries are also suffering from this inflationary environment.

In this context, it was obvious that central banks would tighten monetary policy. Now, after the “roller coaster” of January, investors have begun to accept the rate hike. The beginning of February, or rather the first week, successfully started for risky assets, in particular, cryptocurrencies. Bitcoin price according to data, increased by more than 20% from the January low. The same level of growth for Ethereum and some other altcoins.

What was supposed to be the solution to the problem – the takeover, becomes an oversight. Now the Labor Bureau has published data on inflation and employment in the United States. Markets have learned that annual inflation in the US is 7.5%. James Bullard, the head of the Missouri Fed, a big advocate of the “hawks”, came out on the carpet and urged his fellow members of the US Central Bank to raise rates as soon as possible. An emergency FOMC meeting was held on Monday. Fear gripped Wall Street during this session. However, major sales will occur when the minutes of the emergency meeting are published.

Cryptocurrencies, despite the announcement of the meeting, were able to resist, eventually held on to important support levels that need to be protected. In case of worsening of the situation, the worst scenario seems unavoidable. Later, in our tech analysis, we`ll see what support levels need to be kept to avois falling in the chaos zone.

In any case, “the Fed is committed to achieving maximum employment and 2% inflation in the long term,” the minutes say.

Escalation of the Ukraine situation is sending markets into a panic

This diplomatic event holds risky assets by the throat. In fact, investors are concerned that there are so many twists and nuances in this issue that it clouds the prospects for its solution.

Anxiety and uncertainty do not please the markets. If there is a real conflict between Russia and Ukraine, it could have an impact on European countries, most of which depend on Russian gas. So, let’s go back to the biggest evil of 2022, namely inflation. And this little word is not the best friend of the market.

There is extreme fear and panic in the market again.

Unfortunately, cryptocurrencies that are supposed to serve as a safe haven from inflation, like gold and bonds, are trapped in this correlation with risky Wall Street assets. For more than a year, cryptocurrencies have followed the Nasdaq and S&P 500 at a more bullish or bearish pace, depending on the trend.

Bitcoin: data on the network is already causing alarm

Glassnode, in its famous On-Chain Data Newsletter, provides us with an opportunity to look at investor behavior using information decrypted from the Bitcoin ecosystem. In the latest issue titled: “Investors Reduce Risk Ahead of Rate Hikes,” Glassnode reveals some indicators that the market has not been in good momentum. In this article, they review futures market data.

The Bitcoin futures market, which shows investors’ expectations regarding the future price of the asset, shows a fairly even trend in March. Glassnode notes that investors are getting rid of leverage in futures contracts. The main reason is the decision of investors to liquidate their futures positions, rather than forced selling/trading due to liquidations and price volatility. As a result: open interest in futures contracts decreased from 2.0% to 1.76% of market capitalization.

Leverage ratio of open interest on Bitcoin futures. Source: Glassnode
Leverage ratio of open interest on Bitcoin futures. Source: Glassnode

What technical support levels of BTC should be monitored?

The price of Bitcoin began to rise at the end of January after a short-term drop to $ 33,000. However, when the Bitcoin exchange rate reached $45,000, the resistance turned out to be too strong, and the price pulled back. Initially, it seemed that the BTC was holding above $42,000, and then recovered to $44,000.

However, Bitcoin could not hold on to what it had achieved, and at the end of last week it plummeted to $ 40,000. At the weekend, the $40,000 mark also failed to hold, and the BTC fell to $38,350. Later in the day, the asset dropped several more times to $ 38,200, but in general, the price remained at this level.

BTC price movement Source:
BTC price movement Source:

According to Michael Van de Poppe, until Bitcoin breaks above $50,000, we cannot talk about a bullish trend. In the image below, the expert shares the areas that BTC needs to cross in order to spur growth.

To this image Van de Poppe wrote:
To this image Van de Poppe wrote:

“In fact, nothing has changed. I’m still looking at Bitcoin and prefer to see the breakout of this block of weekly orders. If that doesn’t happen, then I won’t be bullish.”

The Pentoshi analyst also believes that the tone in this matter is elevated, since the bearish trend still dominates, despite the echoes of the upward rally. He said,

“Despite all the “bullish” propaganda, the price has always respected the levels. Bulls survive here. I will still trade at the level with a return, but I know that the risk of falling is high.”

An optimistic note comes from the IncomeSharks trader, who notes that Bitcoin worth $40,000 is a reason for optimism.

“Considering everything that has happened over the years, how can you not be optimistic, knowing that Bitcoin is still worth more than 40,000? Its value has continued to grow almost every year since its inception. This is a stronger asset than many people think”.

But, judging by recent political events, the markets will not recover soon.