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The past few days have been rather tough in the cryptocurrency market. The total capitalization has dropped by around $360 billion since February 20th as the major coins take a beating.
Bitcoinâs price declined by about $13,000 since its all-time high, and in the past 24 hours alone, it lost around 15% of its dollar value.
With this in mind, we take a look at three possible reasons for this crash in BTCâs price.
Healthy Correction, Profit Taking
Right off the bat, itâs worth noting that the market was in a parabolic state before the most recent corrections. While the notion of âup onlyâ does sound appealing, there are some considerations â after all, investors are bound to take some profits off the table at some point.
As CryptoPotato reported earlier this week, exchange inflows spiked by more than 1,000% prior to the dump on February 23rd. In other words, investors seemed to have been taking profits off their positions.
This is only natural, and itâs also healthy. What is more, itâs also important to realize that this bull run hasnât really seen as many serious corrections compared to the one back in 2017. Then, the market saw at least 6 corrections with a magnitude of 30% or more, and so far, we havenât even seen one.
Bitcoin has historically been a lot more volatile compared to traditional financial markets, and a 30% correction is to be expected at some point. Itâs critical to remember that unrealized profits are not realized profits, and a rally like the one weâre having since late last year does increase the odds of people taking some money off the table, given the parabolic increase in Bitcoinâs price. After all, despite the recent correction, BTC is still up 300% since October.
Overly Leveraged Long Market â Long Squeeze
Another thing worth considering is that the market has been overly leveraged, with long positions taking the lionâs share. Data from Bitfinex, one of the leading cryptocurrency exchanges, shows that on February 21st, BTC longs peaked at around 29,000. The chart tells the story of what happened next:
Bitcoin Leveraged Long Positions. Source: TradingView
As clearly seen above, there was a massive long squeeze, liquidating over 21% of the long positions. This triggers a cascading effect as the price keeps going through the liquidations at an accelerated rate.
Going forward, the funding rates on margin positions also went through the roof and was in desperate need of a reset. This also happened. Data from the popular analytics resource CryptoQuant reveals that the recent correction sent funding rates 30 days back, allowing more breathing room for leveraged investors going forward.
Funding Rates. Source: CryptoQuant
Wall Street Went Crashing â Bitcoin Correlated
Now, letâs take a look at the global macroeconomic picture. Zooming out of the cryptocurrency market reveals that it wasnât the only one taking a beating.
A closer review of the performance of some of the major stock indices, such as the S&P 500, as well as the NASDAQ 100, shows a heavy correlation between the traditional financial markets and Bitcoinâs price.
S&P 500, NASDAQ 100, Bitcoin. Source: TradingView
As seen in the above chart, the prices of all three are moving in serious correlation and saw similar corrections over the past week.
However, itâs also true that correlation doesnât always mean causation, but in the events of the last seven days, thereâs merit to that notion. After all, Bitcoin remains a relatively risky play for most investors, and it makes sense to liquidate some profits to offset potential losses caused by the downturn of the traditional financial market.
This is especially true when Nasdaq went through the biggest slump since October 2020. This happened as government bond yields gave the market a jolt and investors favor companies that would benefit from a broader economic recovery throughout the year.
Rates matter. At 1.5%, the yield is comparable to S&P 500 dividend yield,â said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia. âAnd thereâs no capital risk with a 10-year, youâll get your principal back. All of a sudden itâs competitive with stocks.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.