2 reasons why Bitcoin and other crypto just crashed

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As a seasoned crypto investor with battle scars from numerous market corrections, I can confidently say that this latest dip is just another chapter in the rollercoaster ride that is cryptocurrency trading. The Fed’s decision to cut interest rates by 0.25% was indeed the catalyst for this week’s crypto crash, but it’s nothing new under the sun. The market has learned to dance to the Fed’s tune over the years.

This past week saw a significant downturn in the crypto market, with Bitcoin‘s value dipping momentarily below $100,000 and the Crypto Fear & Greed Index shifting from the exuberant 88 to more cautious 69. But why did the cryptocurrency market experience this decline this week?

On December 19th, Bitcoin (BTC), the largest cryptocurrency, was being traded at approximately $102,300. In contrast, Ethereum (ETH) fell to around $3,600. Notably, some other digital currencies, such as Cosmos, Floki, THORChain, Curve DAO Token, and Fantom, experienced slower growth or even declined during this period.

Crypto crashed because of the Fed decision

The primary cause of the recent cryptocurrency market downturn can be attributed to the Federal Reserve’s decision. Specifically, the central bank chose to reduce interest rates by 0.25%, a move that had been predicted by many. This reduction in rates accumulated to a total decrease of 1% for the year.

As an analyst, I’m sharing that the Federal Reserve signaled a plan for two more rate cuts by 2025, but with a caveat: they’re keeping a close eye on inflation. Their concern is that inflation might stay stubbornly high, and it may not reach their target of 2% until 2026 or even 2027.

A more cautious stance by the Fed caused cryptocurrencies and other risky investments to drop. The U.S. stock market dropped significantly, with the Dow Jones and Nasdaq 100 indices decreasing by more than 2%. Yields on U.S. Treasury bonds reached highs not seen in several months, with the 10-year yield reaching 4.557% and the 30-year yield increasing to 4.7%. Additionally, the U.S. dollar index hit a two-year peak.

Mean reversion and distribution

Cryptocurrencies have experienced a dip due to profit-taking, fear, reversal to average values, and the application of the Wyckoff Method, which suggests selling at high points.

Historically, it’s common for cryptocurrency investors to sell their holdings (take profits) when prices of Bitcoin and other tokens significantly increase. This action is often due to the concept of mean reversion – a theory suggesting that extreme deviations from the average will eventually be corrected – and the Wyckoff Method, a trading technique used to identify such trends.

In simpler terms, mean reversion refers to a scenario where an asset that’s been increasing in value might decrease so it can approach its typical long-term value (as indicated by historical averages). To illustrate, Solana is currently approximately 20% higher than its 200-day moving average. As a result, there’s a possibility that it could drop to reach closer to this average level.

The Wyckoff Method identifies key phases in an asset’s lifecycle: accumulation, markup, distribution, and markdown. The recent crypto surge was part of the markup phase, while the ongoing decline could signify either a distribution phase or the start of markdown.

Will crypto prices bounce back?

The prices of most cryptocurrencies tend to follow Bitcoin’s trends. Previously mentioned was the cup-and-handle pattern in Bitcoin, suggesting an impending rally that might reach $122,000 soon. If this comes to pass, it could stimulate a rebound among other cryptocurrencies as investors seize the opportunity presented by the dip.

After a drop in value, there might be a brief rebound, often referred to as a “false recovery,” where the asset seems to recover momentarily but then continues to fall again. This is similar to what happens when you drop a cat – it might briefly bounce back up before falling down again.

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2024-12-19 18:28