Bitcoin Drops Below $80,000: This Time It Might Be Truly Risky
Editor
This morning, I was surprised to see Bitcoin’s chart. It fell nearly 6% in a day, dropping to the $85,000 level. Bitcoin has been somewhat unstable in recent weeks, but this decline seems more severe than expected. After reading an article from the Korea Economic Daily, it seems that multiple factors are at play, suggesting this might not be a simple correction.
According to Coinbase, Bitcoin was trading at $85,843 at 4:20 PM on December 1st, a 5.84% decrease from 24 hours earlier. More surprising was that it fell to $83,807 at 10:45 AM. Since it dropped to the low $80,000s on November 21st, this marks another steep decline in just ten days, which is likely burdensome for market participants.
It’s noteworthy that not only Bitcoin but the entire cryptocurrency market declined together. Ethereum fell over 7% to the $2,700 range, and Solana dropped more than 8% to $124. This isn’t an issue with individual coins but rather a signal of deteriorating market sentiment. Particularly for Solana, which has been quite strong this year, a drop of over 8% indicates how strong the risk aversion sentiment among investors is.
Stocks related to cryptocurrencies also took a hit, with Coinbase down 4.76% and Robinhood down 4.09%. This phenomenon demonstrates the high correlation between cryptocurrencies and related companies. For Coinbase, whose fee revenue is determined by trading volume, Bitcoin’s price instability can lead to a surge in trading volume but also a decline in investor confidence, directly impacting its stock price.
The Perfect Storm of Chinese Regulations and Leverage Liquidation
The immediate cause of this decline is attributed to the People’s Bank of China’s warning against illegal activities related to cryptocurrencies. While China’s tough stance on cryptocurrencies is nothing new, it shows that the market still reacts sensitively to statements from the Chinese government. Considering the significant influence of Chinese capital in the global cryptocurrency market, such regulatory concerns inevitably have a negative short-term impact on the market.
However, the more serious issue seems to be leverage liquidation. According to Ben Emons, CIO of FedWatch Advisors, the price drop is particularly related to a $400 million exchange liquidation. With $400 million being approximately 588.4 billion won, a liquidation of this scale occurring at once can have a significant impact on the market. Especially since some exchanges allow leverage investments up to 200 times, even a small price movement can trigger a chain of large-scale liquidations.
The risks of leverage trading have been confirmed multiple times. When Bitcoin plummeted from $64,000 to the $30,000 range in May 2021, and during the Terra Luna incident in 2022, leverage liquidations were major factors accelerating the decline. Emons’ warning that “if Bitcoin’s price does not escape its current low, additional liquidations will occur” can be understood in this context. It seems that the current $83,000 level is acting as a sort of Maginot Line, and if this level breaks, the likelihood of chain liquidations increases.
The decline in trading volume pointed out by Grayscale’s research head, Zach Pandl, is also a concerning signal. Low trading volume means market participants are on the sidelines, and in such situations, prices can move significantly even with small shocks. If his analysis that “investors’ risk appetite is shrinking” is accurate, high volatility is likely to persist for the time being.
The Macroeconomic Environment and Bitcoin’s Dilemma
This isn’t just a problem for cryptocurrencies. Uncertainty surrounding the U.S. interest rate cuts and concerns about the macroeconomy are dampening overall risk asset investment sentiment. The market’s interest is growing in how the Fed will adjust rates at the December FOMC, and if they take a less dovish stance than expected, risk assets, including Bitcoin, could suffer greater impacts.
While there are claims that Bitcoin acts as a hedge against inflation as ‘digital gold,’ it has been confirmed once again that it still has the characteristics of a risk asset. When concerns about interest rate hikes or economic recessions grow, Bitcoin tends to react similarly to the stock market. Especially since institutional investors have entered en masse, the correlation with traditional financial markets has increased, raising questions about Bitcoin’s status as an independent asset class.
Currently, Bitcoin has fallen over 30% from its all-time high of $126,210.50 recorded on October 6th. From a technical analysis perspective, this is quite a significant correction, but the problem is that it’s difficult to predict when this correction will end. Especially with leverage liquidation pressure still present and macroeconomic uncertainties unresolved, further declines cannot be ruled out.
On the other hand, such corrections might make the market healthier in the long run. Excessive leverage is being cleared, and speculative demand is decreasing, creating an environment where growth can occur on a more stable foundation. Even after experiencing the crypto winter of 2022, Bitcoin eventually recovered, and it seems likely that it will gradually stabilize over time this time as well.
However, in the short term, volatility is likely to continue, and whether the $80,000 level can be defended will be a crucial turning point. If this level breaks, we might see the $70,000s or even the $60,000s, but if it climbs back above $85,000, a gradual recovery might be expected. In any case, it seems to be a time to closely monitor market trends for the time being.
This article was written after reading a trend article and adding personal opinions and analysis.
Disclaimer: This blog is not a news outlet, and the content is the author’s personal opinion. The responsibility for investment decisions lies with the investor, and no liability is accepted for investment losses based on the content of this article.
