12 Jan 2021 Arjun Agarwal
Three Main Reasons Behind Bitcoin’s 30% Price Slump
Bitcoin, dubbed as the flagship cryptocurrency to date, suffered from an $11,000+ price slump, resulting in 29 percent gains wipeout to trade as low as $30,549.60 on some exchanges. Currently, Bitcoin is trading at $33,406.83.
The price fall also managed to shrink Bitcoin’s market capitalization by $205 billion to $627 billion, which indicates the worst performance for the #1 cryptocurrency since the COVID-19-induced market crash in March 2020.
Despite analysts warning that a heavy correction in Bitcoin’s price is imminent, many traders felt shocked about how steep the correction is. However, the correction did not manage to mitigate Bitcoin’s 900% bullish run since March, when one BTC was traded for as low as $3,858.
Bitcoin vs US stimulus packages
One of the reasons for Bitcoin’s short-term rise and fall is the stimulus packages, released by the United States in order to aid the US economy. However, stimulus weakened the US dollar against haven assets like Bitcoin and gold, which caused a bullish rally among investors and speculators. However, the current price correction helped the US dollar index strengthen its positions after bottoming out at 89.20. Goldman Sachs analysts claimed the move to be a “crowded USD sentiment,” after a rise in long-term US Treasury bonds yields.
US low-interest rate policy
Bitcoin’s price actions may be falling a victim to a taper tantrum, which is now a real risk, according to Aneta Markowska, an economist at Jefferies. Markowska raised an alerting flag amid the US central bank discussing the possibilities of limiting the low-interest rate policy due to a brightening economic outlook.
“We assume an additional $1 trillion of stimulus in the next few months, which will add roughly two percentage points to growth over the next two years. This will close the output gap roughly 4-6 quarters “ahead of schedule,” pulling forward the Fed liftoff from 2024 to early 2023,” Markowska added.
Bitcoin also may have entered in an overbought state, according to some technical indicators on Bitcoin’s price. Despite the modest corrections, Bitcoin saw a two-month price climbing spree, with the price corrections allowing traders to “buy the dip” and further speculate with the price of the top cryptocurrency. However, the Relative Strength Index (RSI) showed a peaking overbought signal, which usually suggest deeper price corrections.
Meanwhile, JPMorgan strategists made a warning that a Bitcoin exchange-traded fund, operating in the United States may make a hit on Bitcoin’s prices in the short term. One of the biggest concerns is that a Bitcoin ETF could undermine Grayscale’s Bitcoin Trust (GBTC) monopoly, which could be a bearish sign.
“A cascade of GBTC outflows and a collapse of its premium would likely have negative near-term implications for Bitcoin given the flow and signaling importance of GBTC,” Nikolaos Panigirtzoglou and other Bloomberg strategists noted.
A similar chain of events happened in December 2017, when the financial world saw the launch of Bitcoin futures contracts, which coincided with Bitcoin’s previous all-time high. Both the Chicago Mercantile Exchange (CME) and Chicago Board Options Exchange (CBOE) launched futures contracts on Bitcoin. A year later Bitcoin saw an 84% price decline, trading as low as $3,200.Bitcoin Cryptocurrency Crypto Market crypto market monitoring Bitcoin price bitcoin news bitcoin news today