Bitcoin Experiences Sudden Plunge: Potential for Extended Crypto Market Downturn Ahead

“Bitcoin has seen its lowest point in the past fortnight,” noted Alex Kuptsikevich of FxPro, a brokerage firm. “Falling below $65,500 might indicate a shift to more pronounced losses—with the key Fibonacci retracement level hinting at a potential descent toward $60,000.”

The current market activity suggests a temporary but notable consolidation within the crypto universe, potentially influenced by profit-taking from long-term investors. Meanwhile, inconsistent liquidity in the digital currency exchanges could lead to more abrupt price movements.

Liquidity, a vital component in financial markets that ensures assets can change hands rapidly without significantly affecting prices, took a heavy hit following the FTX exchange collapse in late 2022. However, the recent rally in digital assets has reportedly returned Bitcoin’s market depth—indicating liquidity—to levels seen before the FTX event, as per a report by analysts from Kaiko, a cryptocurrency data firm, on Monday.

Not all exchanges are equally stable, and fluctuations in liquidity are becoming evident amidst the introduction of new spot Bitcoin exchange-traded funds (ETFs). Such developments could potentially lead to erratic trading patterns and more dramatic market corrections if the downward trend persists.

“During an overnight market event on the BitMex platform, Bitcoin’s price plummeted to $8,900 due to a substantial sell-off of $55.5 million,” stated analysts from Bespoke Investment Group in a recent brief. “For an asset with a valuation over $1 trillion, a sale of $55 million prompting such a steep decline certainly raises questions about market liquidity.”

Despite the setbacks, many in the market maintain a bullish perspective on Bitcoin’s future.

Investor interest in cryptocurrency seems to be sustained, in part, by new spot Bitcoin ETFs that were sanctioned by US authorities in January. These ETFs have contributed to significant capital inflow, with digital asset investment products seeing unprecedented weekly inclusions of $2.9 billion, boosting the total for the current year to $13.2 billion, according to statistics from CoinShares.

With anticipation of the upcoming Bitcoin ‘halving’ next month—which reduces the new supply of coins—market supply is expected to constrict at a moment when demand is rising, potentially providing additional support to the currency’s valuation.

The enduring confidence in broader financial markets, reflected by the near-record levels of the S&P 500 and Nasdaq, sustains the crypto market which is sensitive to overall risk appetites. Nevertheless, the latest downturn in technology stocks indicates a cautious approach in the markets on Tuesday, which could also temporarily hinder cryptocurrency values.

In addition to Bitcoin, Ether has suffered an 8% loss, dropping to $3,250, after reaching above $4,000 just last week. Lesser-known cryptocurrencies, or ‘altcoins’, also experienced declines, with Cardano and Polygon witnessing a 6% and 9% reduction, respectively. Meme-inspired cryptocurrencies like Dogecoin and Shiba Inu also felt the downturn.

For correspondence, contact Jack Denton at jack.denton@barrons.com