Why crypto market’s dip isn’t the end of the bull market — According to experts

As a seasoned investor with over two decades of experience navigating various market cycles, I find myself intrigued by the current state of the crypto market. The recent dip, while causing initial concern for many, reminds me of the old saying, “Buy low, sell high.

Could the recent sell-offs and price drops signal an extended period of crypto winter, or are they simply a temporary pause before another market surge (bull run)?

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Crypto market stumbles as year-end draws near

As the end of the year approaches, it appears that the cryptocurrency market is temporarily halting its growth following an extended period of upward momentum. The combined value of all cryptocurrencies has dropped by over 6%, landing at approximately $3.47 trillion as of December 20th.

Currently, the value of one Bitcoin (BTC) is hovering slightly under the significant level of $100,000, trading at approximately $96,680 – representing a decrease of almost 3.5% over the previous 24-hour period.

As an analyst, I’ve observed a significant drop in the value of Ethereum (ETH), the second-largest cryptocurrency by market capitalization. Over the past few days, it has plunged approximately 6%, and over the weekly period, its value has decreased by 15%. This decline has brought ETH back to around $3,400.

Even areas outside the initial decline haven’t been exempt. The Top 100 alternative coins have shown losses between 10% and 20%, whereas meme coins, famous for their volatile price movements, have taken the most significant hit, averaging a 12% overall drop across the sector.

For example, Dogecoin (DOGE) dropped by more than 12%, reaching $0.31, and Shiba Inu (SHIB) decreased almost 10%, to $0.0000211. Similarly affected meme tokens such as Floki (FLOKI), Bonk (BONK), and Pepe (PEPE) saw their weekly losses ranging from 35% to 40%.

In the midst of the turmoil, it was disclosed that over 374,000 traders experienced a forced closing of their positions in the last 24 hours, amounting to a substantial $1.37 billion, as reported by Coinglass.

13 billion dollars out of the total liquidations were from long positions, indicating that overly optimistic bets have backfired. Bitcoin was responsible for 320 million dollars in liquidations, primarily due to long positions, while Ethereum experienced a loss of 308 million dollars, with around 263 million linked to long positions.

Examining open interest, or the combined worth of all active futures agreements, seems to indicate a potential shift towards a downward trend in the market. This could signal an approaching period of bearish conditions.

Over the last few months, I’ve noticed a gradual escalation in Bitcoin’s open interest, which soared from approximately $32 billion in early October to an impressive $68 billion by December 18. However, recent events have led to a dip, with the figure now standing at $62 billion as of December 20. This decrease aligns with the significant price drop observed during the same period.

Normally, when both the open interest and prices decrease, it suggests a trend of increasing pessimism among traders, since they seem to be closing their positions and lowering their investments in response to market instability.

Fed’s interest rate moves spark volatility

In my analysis, the recent significant downturn in the cryptocurrency market appears to be largely influenced by the U.S. Federal Reserve’s latest interest rate decision and the subsequent comments made.

On December 18th, the Federal Reserve decided to lower the federal funds rate by 0.25%, making it 4.5% now – this marks the third reduction in interest rates they’ve made this year.

As a researcher, I found that, although the expected adjustment took place, contributing to a 1% decrease in the annual total, the central bank’s communication was markedly restrained in its tone.

2025 will see a maximum of two more interest rate reductions according to the central bank’s plans, with any further modifications contingent upon the direction of inflation and the state of the broader economy.

As a crypto investor, I’m closely observing the Fed’s cautious stance, which underscores their persistent efforts to keep a lid on inflation that’s projected to surpass their 2% benchmark well into 2026.

news that spread throughout the financial world caused a significant stir, affecting mainly high-risk investments such as cryptocurrencies and equities. The American stock market responded swiftly, leading to a steep decline for both the Dow Jones and the Nasdaq 100 by more than 2%.

Concurrently, bond yields increased sharply as investors moved towards the security offered by U.S. Treasuries. The 10-year yield rose to 4.557%, and the 30-year yield reached 4.7%.

At this moment, the U.S. dollar index surged to its highest point in two years. This increase made financial circumstances more stringent and put additional stress on worldwide markets, including cryptocurrencies.

Bitcoin’s climb above $100,000 earlier this month was undeniably a milestone, and Ethereum’s rally past $3,500 similarly ignited widespread optimism. 

Instead, the overly optimistic mood frequently leads traders to secure their gains, particularly during market corrections that follow prolonged surges, as risk tolerance decreases and traders readjust their portfolios.

During this period, things didn’t change either. Instead, investors started favoring secure investments such as treasury bonds and cash. However, the cryptocurrency market experienced a double challenge: a decrease in demand due to this shift and selling triggered by panic.

The rapid decrease in price led to a mass selling spree, causing numerous forced closures of overleveraged trades in the futures sector. This chain reaction caused prices to drop dramatically, pushing the cryptocurrency market squarely into a corrective phase.

Traditional market volatility drags crypto lower

In simpler terms, the instability seen in conventional money markets is affecting the cryptocurrency world too, particularly Bitcoin, as it grapples with broader economic issues that have left investors confused and uncertain.

Examining the circumstances using Kobeissi Letter’s perspective offers insights into how increasing uncertainty, shifting relationship between markets, and broader economic trends are influencing the story surrounding Bitcoin and digital currencies at present.

This week, the Volatility Index (VIX), also known as the “gauge of fear” in traditional markets, has experienced a significant jump of almost 100%, indicating increased apprehension and uncertainty among investors.

As a crypto investor, I’ve noticed that the recent surge in the market aligns with the Federal Reserve adopting a more aggressive stance, or being “hawkish.” Although they reduced interest rates on December 18, their hint at a slower pace of future cuts has caused uncertainty. This uncertainty seems to have affected risk assets like Bitcoin, as the expectation for prolonged higher interest rates makes traditional safe-havens such as U.S. Treasury bonds more appealing.

The interest rate on a 10-year U.S. government bond has increased to 4.5%, causing concern as it approaches the 5% mark. This level has historically led to market corrections for both stocks and cryptocurrencies.

Examining it more closely, the behavior of Bitcoin is frequently comparable to traditional financial markets as indicated by its correlation with established market indices.

In June of this year, Bitcoin showed a strong connection with both the Nasdaq and S&P 500 markets, reaching correlations of 0.9 and 0.86 respectively. This signifies that Bitcoin generally followed the same market trends as tech stocks, gaining from the same optimistic investor sentiment.

Starting from mid-July, the correlation shifted to -0.87 and -0.86, indicating an unusual occurrence where Bitcoin seemed to function as a safe haven amidst equity market downturns. This is an uncommon deviation where Bitcoin momentarily served as a protective asset.

Lately, starting from December 19, the correlations between these indices (Nasdaq and S&P 500) and Bitcoin have weakened, with values of approximately 0.57 for Nasdaq and 0.38 for S&P 500. Although Bitcoin continues to respond to broader economic changes, its price fluctuations are increasingly influenced by distinct factors like the flow of investments into spot Bitcoin ETFs and other significant events in the U.S. crypto market.

For a while, Bitcoin might encounter several challenges. The increase in Treasury bond yields is causing institutions to shift their funds towards more secure investments, while stocks are finding it difficult to maintain stability due to increased market turbulence.

On the other hand, the weakening relationship between Bitcoin and conventional indices indicates that the cryptocurrency market may not always follow the lead of broader market movements.

If this separation persists, Bitcoin might develop its own distinctive storyline, yet only if it manages to endure the ongoing economic turbulence we’re experiencing now.

Expert takes: Is this a bull market breather?

There’s ongoing disagreement among experts about Bitcoin’s immediate path, but most agree that this recent dip might not be the demise of the bull market. In simpler terms, they believe this drop is concerning, but it might not mean the end of the rising trend for Bitcoin.

Lark Davis uses historical comparisons to offer insight. He notes that in late December 2020, Bitcoin experienced a 12% decrease following a significant rally, but then soared by an impressive 136% within the next 23 days. He highlights that this recent 13% decline mirrors a similar pattern after a strong Q4 performance.

Davis suggests that a potential drop of 10-15% could still occur, but he emphasizes that there’s still a significant amount of potential growth left for Bitcoin and the overall crypto market, comparing it to a vehicle having ample fuel remaining.

To further elaborate on the topic, Rekt Capital points out that corrections during the process of determining prices are not only usual but essential. These “price discovery corrections” typically stretch over a couple of weeks, and it’s common to encounter up to four such events within a single bull market trend.

As stated by Rekt Capital, this seems to be the initial correction within the ongoing cycle, presenting a favorable chance for re-accumulation with a substantial likelihood of a price turnaround towards an upward trend.

Michael van de Poppe shifts his perspective somewhat, zeroing in on the possibility of consolidation. He points out that Bitcoin’s drop beneath $102K sparked a significant fall in alternative cryptocurrencies, yet this level of volatility is typical within a rapidly expanding market.

He suggests that these situations represent chances, and further occurrences like these may transpire. Looking ahead, he predicts that Bitcoin might stabilize, whereas some altcoins could witness another surge.

Looking past temporary evaluations, larger-scale trends point towards long-term prospects. As per Bitcoin Magazine, Groupe BPCE – a prominent French bank boasting 35 million users and managing $1.5 trillion in assets – has been given the green light to introduce Bitcoin and cryptocurrency investment solutions.

As Bitcoin becomes more integrated into traditional financial systems and easier for average investors to use, it may help balance out present market anxieties.

However, risks remain. Elevated Treasury yields, macroeconomic uncertainty, and rising volatility in traditional markets continue to pose challenges. 

As a researcher, I’d advise that one should approach trading and investment with prudence, as there might be additional fluctuations leading to potential declines. It’s crucial to trade thoughtfully, ensuring not to invest an amount exceeding what you’re prepared to part ways with.

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2024-12-20 23:53