Bitcoin’s brief but sharp tumble toward $40,000, accompanied by a broader selloff in the crypto market, signals a potential deleveraging phenomenon rather than a fundamental news catalyst.
On Monday, the largest cryptocurrency plunged as much as 7.5% to $40,521 before recovering some losses to trade 3.7% lower at $42,165 at the time of writing.
The top 100 digital assets, as measured by an index, dropped approximately 4%, marking the most significant decline since November 22.
Bitcoin (BTC) has been on a remarkable rally this year, driven by expectations of regulatory approval for the first US exchange-traded funds directly investing in the cryptocurrency.
This anticipation has expanded the potential investor base for cryptocurrencies.
Additionally, bets on the Federal Reserve cutting interest rates in 2024 have further fueled the rally in Bitcoin and the broader virtual currency market.
Richard Galvin, co-founder at Digital Asset Capital Management in Sydney, highlighted the substantial rise in market leverage, attributing the recent fall to a market deleveraging rather than any specific fundamental news catalyst.
“The current fall looks like a market deleveraging as opposed to any fundamental news catalyst.”
Around $300 Million Worth of Positions Liquidated
Coinglass data shows that approximately $299 million worth of crypto trading positions, betting on higher prices, were liquidated on December 11, marking the highest tally since mid-September.
As investors brace themselves for US inflation data and the Federal Reserve’s final policy meeting of 2023, there is a sense of caution surrounding aggressive wagers on rate cuts.
Global stocks and US equity futures displayed wavering trends as the dollar gauge ticked up, reflecting a cautious sentiment among investors.
Market analyst Tony Sycamore from IG Australia Pty noted that traders usually take profits during this period and expects the price declines towards the $37,500 to $40,000 range to be well-supported by dip buyers.
Although Bitcoin has surged over 150% year-to-date, contributing to the broader recovery in digital asset prices after a significant downturn in 2022, the token remains far below its pandemic-era record of nearly $69,000 set just over two years ago.
Bitcoin’s Rally Shows Low Correlation With Traditional Assets
Bitcoin has displayed resilience by surging to a more than 19-month high, even as global markets experienced a downturn.
The cryptocurrency has gained more than 14% over the past month.
In contrast, global shares and bonds have been struggling with losses since the beginning of the week.
This divergence highlights the current low correlation between cryptocurrencies and other traditional macro assets, Sean Farrell, the head of digital-asset strategy at Fundstrat Global Advisors LLC, said.
Throughout 2023, Bitcoin’s correlations with stocks and gold have diminished as specific factors within the crypto market propelled a remarkable 152% surge in the value of the largest digital asset.
One of the key drivers behind the gains is the anticipation that the United States will approve its first spot Bitcoin exchange-traded funds (ETFs), potentially expanding the demand for the token.