Crypto Market Analysis — Why Did The Floor Just Drop?

Markets never forget, but people do.

Besides being the name of a great book, it also marks the feeling I had, seeing a lot of people freak out yesterday over the <$1000 drop in Bitcoin Price.

Even though the last big price drop (from ~$7350 to ~$6300) was just a couple of months ago, people still lose it every time. Having said that, last time we didn’t break the yearly bottom.

While our working theory is that it is just bitcoin being bitcoin and until adoption increases, it will continue to be volatile, we do try to find the order of things so we can learn and better understand the market.

So Why Did This Happen?

While we haven’t seen any events that would directly justify a $15B drop in the overall market cap, we do have a couple of working theories that each of them separately and all of them together could have contributed to yesterday’s price drop.

1. The BCH Hard Fork — Following on yesterday’s analysis of the upcoming fork, it appears the war between the two factions could be one of the reasons for yesterday’s market instability. Bitmain’s Jihan wu did come out with a statement saying Bitmain isn’t going to start a hashwar nor is it going to transfer hash power from its BTC miners to BCH. But yesterday’s news of the company shipping over 120K mining rigs to its remote mining farms in China, alongside a sharp drop of almost 30% in the Bitcoin Blockchain’s hashrate in the last couple of weeks, is telling a different story. And while both things could be circumstantial, they do affect some core fundamental indicators for Bitcoin, that might lead to market insecurity in the asset’s abilities to maintain its current value.

2. The ‘Death Cross’ Theory — Whether you are a fan of Technical Analysis, or you think its just a bunch of mumbo-jumbo, there is an increasing number of people coming into to crypto from traditional markets, who do. And when those come to play, TA becomes a self-fulfilling prophecy. The “death cross” in question is the one where the 50-candle simple moving average (SMA) cuts the 200-candle SMA from above, a bearish signal that is considered by many a critical one. On the other side, this indicator is probably representing the prolonged bear market, which might lead to a bounce and maybe even a trend reversal later on. This death-cross was last seen in December 2014, followed by a 50 percent drop in Bitcoin price over four weeks, and we all remember how 2015 looked like. The signal alongside historical behavior of Bitcoin could have led to a large-scale panic sale, fearing another significant price drop might be coming. Self-fulfilling prophecy always works.

And What’s Next?

While a 10% or even 15% drop isn’t something crypto traders haven’t seen before, it is still hard to keep calm seeing the entire market turning dark red. As of this writing, it seems that the Bitcoin price found a new floor at $5300 and has even gone up a little bit to around $5500–5600.

While our long-term analysis for the market in general and Bitcoin specifically hasn’t changed and remains bullish, for the short-term, we are definitely still in the wind for some more aggressive downward movements and we’ll probably see a few more weeks if not months of the formidable bear market.

On the macro perspective, we believe the market hasn’t really priced in a lot of the good things that are about the happen in the next few months. Bakkt launch in December, Fidelity Digital Assets early next year, Regulated stable coins bringing better market liquidity, and even increasing regulator interest in the space are all positive signals.

This seems to be the beginning of the final leg of the current bear market. We’re not waiting for a new ATH anytime soon, but it does mean we’re seeing this upcoming period as a time where large institutions and whales will be looking to climb on, or back on, the crypto train before it leaves the station for its next big ride.