Analysis of the factors that caused the market pullback over the weekend
Although the market collapse came as a bit of a surprise to investors, there were signs of its approach. And less than 24 hours before the disaster, the alarm had already sounded.
On Friday, December 3, $950 million was due for the execution of option contracts with a significant advantage for bears if the asset did not exceed $57,000. Prior to this session, Bitcoin, according to Coinmarketrate.com, repeatedly failed to overcome this psychological level. Hence the reason for the price drop by 8% a few hours after the expiration of the option contracts.
Some people fantasized so much about Bitcoin with a value of $100,000 that they downplayed the consequences of the November bear market, hoping for an ultra-strong December. Reality hit them in the gut. More than 410,000 positions worth about $2.5 billion were liquidated. It is good to talk about “panic sales” as a factor that caused this terrible market decline, but in fact it is only the result of much deeper reasons.
Let’s stop taking consequences for reasons, otherwise we risk being surprised by a similar situation.
Cold November and risky sentiment fueled by a difficult macroeconomic context
During the day, on November 10, Bitcoin made an impressive intraday jump and took the opportunity to sign a new ATH at $69,044. This was not the only explosion that occurred during the trading session. Ethereum also reached a new multi-year high at $4,878. BNB was just a few dollars away from turning around its multi-year ATH. Other cryptocurrencies also followed suit, showing record figures.
A week after this historic day, on November 18, the first sequence of market correction occurred. The price of BTC dropped to $56K, and lost almost 13,000 compared to ATH. It should be recalled that before the fall to 56K, the leading cryptocurrency of the market consolidated in the range between the May ATH ($64,480) and the level of November 10. Some have already shouted about the return of the altcoin season.
Two events were supposed to simultaneously shake the market and take Bitcoin out of range: Joe Biden’s infrastructure plan and the tightening of Chinese regulation. In its megaplan for infrastructure development, the US government plans to adopt legislation on taxation of crypto assets, tokens and NFT. Meanwhile, the Chinese National Development and Reform Administration (NDRC) continues to tighten the screws on cryptocurrencies, reiterating its desire to stop cryptocurrency mining activities in the country.
The market corrected, but at a fairly moderate level, especially since the key supports were not rejected. At the same time, there was no signal for the resumption of the uptrend.
Looking further?
At the end of the month, scientists discovered a new strain of coronavirus infection in South Africa – Omicron. An option that called into question the already fragile economic recovery in November. According to the US NFP report, only 210,000 jobs were created during the month, while 573,000 were expected.
There was an atmosphere of uncertainty in the market. There were a few small rises, but they were not enough to cause a reversal in the upward direction. Worst of all, the Fed has finally acknowledged (in an unprecedented case) that the inflation situation is not transitory, and that it may last until mid-2022. It is expected that in the coming days, the monetary policy of the US central bank will change towards a “hawkish” tone earlier than expected. It is believed that a reduction in the volume of bond purchases is not far off, but a slight increase in long rates is also possible.
Together Omicron, the Fed and the economic results have created a wave of volatility in the market. On Black Friday, the VIX rose by 54%.
The last two stops for cryptocurrencies will fall on Asia. It was reported that India is in the process of tightening the noose on cryptocurrencies. In fact, the continent’s third-largest economy is simply planning to ban private cryptocurrencies in its country to make way for the central bank’s proposed digital currency, CBDC.
Another killer blow to cryptocurrencies is related to fears of default by the Chinese property giant. Earlier, on December 3, Evergrande made a statement that the Hong Kong Stock Exchange received a notification demanding the enforcement of a guarantee obligation in the amount of 260 million US dollars. If the company does not comply with the request, further claims will follow. The domino effect of the giant’s collapse on the global stock market may affect the cryptocurrency market.
The data on the network was already sounding the alarm
Cryptocurrencies have their own fundamental indicators, which should not be separated from the analysis of their work on the stock market. Just as the macroeconomic context has a significant weight on their price, these so-called “data network” elements can also influence the value of digital coins. For example, CryptoQuant in his Twitter drew the attention of investors to the alarming signs of data on the BTC network.
- Exchange reserve
The reserve of exchanges is an indicator that shows the total number of Bitcoins stored in the wallets of all centralized exchanges.
When this indicator increases, it means that investors withdraw BTC from their wallets to crypto exchanges for exchange for fiat or altcoins. Conversely, if this indicator decreases, it means that investors withdraw their BTC from exchanges and store them in their wallets.
The Bitcoin exchange reserve remained at the top for two weeks, until December 3. On December 4, he fell again. This means that many traders exchanged their crypto assets for other coins during this period, and eventually waited for the crash to buy new tokens.
- Calculated leverage ratio
The estimated leverage ratio is calculated by dividing the exchange’s open futures contracts by the exchange’s Bitcoin reserves. This indicator, in fact, measures the degree of leverage of the average investor. And an increase in the coefficient indicates an increased propensity to risk.
A few hours before the December crash, this indicator reached a historic high, indicating strong leveraged positions on exchanges. It is no coincidence that 2.5 billion options were liquidated on the market in a few hours. The risk was too great.
- The coefficient of the stock whale
According to Cryptoquant: “The stock whale coefficient is the relative size of the top 10 entry trades relative to the total number of entry trades. In a bull market, it often stays below 85%. On the other hand, in a bear market or a false bull market, with a strong fall, it usually stays above 85%.”
It can be noted that since the appearance of BTC ATH, the whale ratio on exchanges has remained above the 85% threshold, indicating clear signals of a bear market, and then fell again after a large-scale collapse over the weekend.
Better days ahead?
Just as the assassination of Archduke Franz Ferdinand was the accidental cause of the First World War, the panic sale was the impetus for the December collapse.
Conspiracy theorists will tell us that the whales hitchhiked to buy BTC at a better price. Who knows! In any case, this large-scale sale of $ 2.5 billion was the most destructive for cryptocurrencies this year after the May one.
Should we say goodbye to the “bull run”?
The trading expert tradingshot is quite optimistic about the fall of the market. He wrote about this in his post on TradingView:
“Bitcoin has fallen by 40% compared to the November 10 high (and the all-time high (ATH), and the market is in total fear mode again. This is not the first time we have seen such a sale. In fact, we can argue that such large pullbacks are a necessary process during a long-term uptrend, and historically create the basis for even stronger and more aggressive parabolic rallies”.
Referring to weekly and daily timeframes, he claims that as long as the weekly candle closes above or at least around 1W MA50, BTC/ USD has a legitimate chance to form support there and start a new rally:
A cryptanalyst with a TechDev twitter account is very positive about the future of Bitcoin. His argument is more about his growth cycle. In his tweet, he posted 4 images with a growth cycle in 2011, 2013, 2017 and 2021. For an expert, a red candle in November is a good signal for the future of BTC. He states:
“Every Bitcoin cycle in history ended with a red month, followed by 2 or 3 very green months”.
Although the experts’ forecasts are based on quite strong arguments, we would like to note that the bullish fantasy carried away almost $410,000 on the day of December 3-4. Don’t get too excited about the “bullish” episodes, always be on the alert, because only naive people believe that the market will always grow and never fall.