“Hodl” no more?
The gloomy weekend of cryptocurrency dubbing that pulled Bitcoin (BTC) below $ 50,000 and ravaged other digital coins have significantly dampened bullishness to investors – some of them predicted a run of $ 100,000 just weeks ago.
Driven by uncertainty over the Federal Reserve moving towards tighter monetary policy in the face of rising inflation, and global fears about the new Omicron variant of COVID-19, the dramatic crack was overloaded by liquidations in the cryptocurrency market, say market participants.
Only on Friday did Bitcoin put over $ 57,000 before the risk aversion that hammered stocks spilled over into the cryptocurrency world ̵[ads1]1; and dragged the leading digital currency down by as much as 20% on the day to below $ 43,000. On Sunday, the currency jumped by over 2% to trade around 49,000.
According to estimates by Larry Cermak at The Block Research, nearly $ 5 billion in open interest was wiped out in as little as half an hour. It helped shave the total market value of cryptocurrency down to around $ 2.3 trillion, a sharp drop from last month’s record high of over $ 2.6 trillion.
In some parts of the market, BTC’s price collapsed even lower, with some exchanges pricing it as low as $ 28,000, according to Jason Lau, CEO of the cryptocurrency exchange Okcoin.
“As is usually the case, cascading liquidations in the derivatives markets exaggerated,” Okcoins Lau explained.
Because fewer people usually shop on the weekends, the crypto markets often handle much lower liquidity levels – which provides even less buffer against nose dives. Lau and investors say that thin market conditions led to the carnage in Saturday’s price action.
On Sunday, some cryptocurrencies took back some lost ground. Ether (ETH-USD) plunged more than 20%, but recovered some losses, currently floating around $ 4,100. Smaller blockchain units where liquidity is even lower, such as Solana (SOL1-USD), also have a 20% net correction.
Nevertheless, the trend counteracted Terra’s Luna (LUNA1-USD) – a stable coin-token that has seen the most significant cryptocurrency gains in recent weeks. Up over 10% on the day, Luna turned the first slide into a weekend race that logs back-to-back all-time highs.
This weekend’s sale is just the latest in several flash crashes this year that have caused some investors to ponder, even when El Salvador’s President Nayib Bukele – whose country became the first sovereign government to embrace Bitcoin as a legal tender – announced he was “buying dip”. ”
The “buy the dip” philosophy is fueled by Bitcoin investors’ belief that no matter how sharp a fall, the asset will continue to rise in the long run, thanks to free money spending and loose monetary policy that triggers inflation.
“Basically, the continuation of monetary expansion and declining purchasing power will not disappear and will only drive more interest in scarce assets such as bitcoin,” Okcoins Lau told Yahoo Finance.
But short-term sentiment about the asset has clearly changed. Bitcoin has experienced “violent fluctuations” of 20 to 30% in previous bull runs before reaching its peak, according to Anto Paroian, CEO of ARK36, a crypto hedge fund.
But this time, BTC’s 20-week moving average – a key bull market indicator – has “now been decisively broken”, Paroian told Yahoo Finance, warning that “the outlook is currently bearish in the short to medium term” as some investors appear. to waste their more risky assets.
With the Fed apparently more concerned about inflation and Omnicron fears rising, investors are returning hopes that Bitcoin will reach $ 100,000 – a “much-anticipated milestone”, according to Baxter Hines, chief investment officer at Texas-based Honeycomb Digital Investments.
Bitcoin’s rally has been driven in part by borrowed money or borrowed positions on derivatives exchanges, with some using the digital currency as margin security. As such, a heavily leveraged market is vulnerable to shakeouts that exacerbate violent moves.
Over the past quarter, money locked in decentralized financial protocols exceeded $ 100 billion, according to DeFi Pulse, a fourfold increase since the beginning of the year.
And as cryptocurrencies “went south” on Friday, so did the collateral loans given to derivatives traders, Hines pointed out – increased margin calls that force traders to close positions to cover losses as well as volatility.
With open interest already sharply down, the fall could be even worse when Monday’s regular session starts. This is because the Chicago Mercantile Exchange (CME), which accounts for an increasing level of open interest rates on BTC futures, does not operate on Saturdays.
“It will be interesting to see what happens when Monday comes,” Lau added.
David Hollerith covers cryptocurrency for Yahoo Finance. Follow him @dshollers.
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