Crypto Traders Explain What Caused the Bitcoin Price Plunge to $3,000s

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The Bitcoin (BTC) price dropped to $3,600 overnight, marking Bitcoin’s biggest daily drop in the last seven years. Over $1 billion worth of longs was liquidated on March 12, causing one of the most intense long squeezes in the crypto market’s recent history.

The main catalyst of the sudden 50% decline in the price of Bitcoin within a span of eight hours was the 9.99% drop of the Dow Jones Industrial Average. The United States stock market experienced its worst sell-off since 1987, as panic over the coronavirus pandemic intensified to unprecedented levels.

In the past seven days, Bitcoin and cryptocurrencies in general have shown a high level of correlation with the U.S. stock market, possibly due to the overall drop in investor appetite for high-risk assets. The steep correction in the U.S. stock market together with a lack of buying demand as Bitcoin’s price fell to the low $5,000 levels ultimately led the price to decline to $3,600.

Traders explain the technical reason behind the drop

Until the global financial market begins to show signs of recovery, potentially through the introduction of more stimulus packages from central banks in Europe and the U.S., Bitcoin is likely to remain vulnerable to abrupt pullbacks in the near-term.

Speaking to Cointelegraph, cryptocurrency trader and technical analyst Eric Thies said that while the focus of investors has solely been on the coronavirus pandemic, there have been major geopolitical conflicts and risks affecting the market as of late, such as the the dispute over oil prices between Saudi Arabia and Russia. The unexpected decline in the price of oil further imposed additional pressure on global markets, adding to the uncertainty, fear and instability felt by investors. As Thies said:

“Today’s massive dump in both the crypto markets and the traditional markets was very interesting to say the least. While many would say it is solely due to the coronavirus, looking into it further and you will see this does not show the usual signs of a recession. This may be because of the war on oil that many people have not heard about due to the news of the virus.”

Thies noted that with the drop to $3,600, a new market cycle for Bitcoin could begin. Top traders have said in the last 24 hours that the overnight plunge of Bitcoin could kickstart a long accumulation phase, similar to in early 2019.

If that happens, institutions could continue to accumulate BTC at lower prices if the appetite for risk-on assets improves over time, making the market less concentrated on whales or individuals that own a significant amount of BTC. Thies explained further:

“One thing I think that is overlooked by many crypto investors is the money flow in this new market cycle. This is the first market cycle where the weight of the money will potentially be held by institutions. That means that Bitcoin is now tied to the traditional markets, and far from being a safe haven when it comes to the emotional cycles of humans, and our instinct to save our money when we become fearful.”

Throughout February, the Grayscale Bitcoin Trust showed a premium of around 30% relative to the spot exchange price of Bitcoin on platforms like Coinbase. This represented a steady inflow of capital from accredited and institutional investors in Bitcoin.

The Bitcoin price crashed down into the $3,000s because of the highly leveraged nature of the cryptocurrency market and the unwillingness of buyers to step in amid extreme volatility and uncertainty. After the drop, the liquidity of Bitcoin wore to the point in which a limit sell order of around $11 million was lowering the BTC price on BitMEX by $300 relative to other exchanges. Cryptocurrency trader Jacob Canfield explained in a tweet:

“This guy is trying to offload $11 million here with limit sells, but it’s been holding the price down relative to other exchanges. Mex was running $300 lower than almost any other exchange due to liquidation backlogs.” 

$11 million limit sell order for BTC on BitMEX

$11 million limit sell order for BTC on BitMEX. Source: Jacob Canfield Twitter

A large portion of the daily cryptocurrency exchange market volume comes from futures trading platforms like BitMEX, OKEx, Binance Futures and FTX. This suggests that the majority of traders in the cryptocurrency market are trading major cryptocurrencies with borrowed capital.

In times of heightened volatility and unforeseen market sell orders in the hundreds of millions of dollars, Bitcoin’s price could react with a severe correction with no end in sight, such as on March 12. Before the large drop occurred, Thies said that $4,800 looked as the next logical level of support based on previous areas with high trading activity. Thies said prior to the drop to the $3,000s:

“It appears BTC may have been caught by the $5.6K breakout range from 2019. For bulls, the only good sign at the moment is that it technically confirms last years breakout as a legitimate change in trend from the 2018 bear trend, with a successful back-test of that break out range.”

The Bitcoin price dropped below every major support, even further than the last remaining support at $4,800 across all major exchanges, as virtually all longs in the market were wiped out in a span of several hours.

A screenshot shared by well-known cryptocurrency trader I am Nomad showed an investor on BitMEX losing 1,220 BTC overnight, which would have been an equivalent of $9.7 million before the drop.

More than $1 billion of longs was liquidated in the last two days on BitMEX alone, precisely because large longs above $10 million started to be stopped or liquidated, which then turned into strong selling pressure.

Industry executives remain positive after the big drop

In the aftermath of the 50% drop in the price of Bitcoin, top industry executives that oversee the sector’s largest investment firms expressed their belief in the asset class and confidence in the long-term trend of the market.

Michael Sonnenshein, the managing director at Grayscale — which oversees the Grayscale Bitcoin Trust, a publicly tradable Bitcoin investment vehicle with around $2 billion in assets under management — said that he hasn’t doubted his faith in the cryptocurrency industry and the community amid this extreme volatility:

“I’m 7+ years into my digital currency journey. Years ago I’d wake up in the middle of the night to check prices or allow my stomach to churn when the market dropped precipitously, but I never once lost faith in what this incredible community has built. Stay strong. HODL on.”

The billionaire CEO of Galaxy Digital, Mike Novogratz, said that the confidence of investors across the world in just about every asset seems to have dropped, which makes Bitcoin all the more valuable in the long term. Paolo Ardoino, the chief technology officer at Bitfinex, said that one single day does not make a market, adding that:

«Bitcoin is a battle tested asset which in time will prove its underlying strength as a genuine store of value. While Bitcoin has grown to fruition during a period of massive QE from central banks it will in time prove its metal as these policies surely begin to fail.»

According to Thies, one positive takeaway from the market crash is that it occured at the beginning of the month, leaving more time for BTC to recover and stabilize. Had the drop happened in late March, it would have caused larger time frame candles like the monthly candle of BTC to close with a drop to the $3,000s, which could have established an intensely negative precedent for the months to come. Thies concluded:

“Although we aren’t sure what mayhem ensues in the media and markets from here, just know this: Buy when people are fearful. Sell when people are greedy. Times like these, in which emption and stop-losses are triggering catastrophic results are typically a sign of true capitulation and often a time to countertrade the masses.”