The cryptocurrency market has seen over $200 million in liquidations. What are the reasons behind the sudden drop?

Author: Felix, PANews

Last night, the calm price trend that had lasted for several days suddenly ended, with cryptocurrencies such as Bitcoin and Ethereum experiencing a sharp decline. Bitcoin dropped to its lowest level since the market panic in early August, nearing $56,000. This drop triggered a new wave of cryptocurrency position liquidations (mainly long positions), and the market generally turned red.

According to Coinglass data, the liquidation amount in the past 24 hours (as of August 16, 11:30 AM) reached $222 million, with $175 million in long positions liquidated, and $161 million occurring in the past 12 hours. Bitcoin had the highest liquidation amount among tokens, exceeding $79 million in the past day, followed by Ethereum, which had a liquidation amount of about $70 million.

Currently, the market has rebounded somewhat, with Bitcoin trading around $58,000, Ethereum around $2,580, and SOL around $140.

Decline in Leverage Long BTC Futures and Stablecoin Demand May Be Reasons for the Drop

At present, the rapid decline seems to have no obvious reason. After the latest Consumer Price Index (CPI) report was released on Wednesday evening, U.S. stocks surged, while Bitcoin and Ethereum prices fluctuated significantly, indicating that this drop seems unrelated to macroeconomic factors. Some believe that the decline in demand for leveraged long BTC futures and stablecoins has led to the drop in Bitcoin prices.

Since August 8, Bitcoin has been trading in a narrow range, unable to break through $62,000 while consolidating the support level at $58,000. This consolidation reflects increasing uncertainty among traders, especially as the funding rate for BTC futures remains negative, indicating lower demand leverage from buyers.

Additionally, on August 15, the trading price of USDT in China fell by 0.2%, marking the lowest level for this indicator in three months, indicating a decrease in demand for cryptocurrencies. This represents a significant change compared to August 6, when traders were paying a 2% premium for USDT.

Based on BTC derivatives indicators and the demand for stablecoins in China, it will be challenging for Bitcoin to reclaim the $62,000 support level. However, historical data shows that retail traders typically react to market trends rather than predict them, so the possibility of a breakout cannot be completely ruled out.

Analysts Bearish on Ethereum

Coincidentally, before the market plummeted, some analysts had already turned bearish on Ethereum, even suggesting it could reach new lows around $1,600.

Arete Capital partner McKenna wrote in an X post on August 15: "I do not believe ETH will break through $2,800-$2,900, but I expect it to remain range-bound for part of August and September."

Meanwhile, analyst Peter Brandt stated that based on two chart patterns, ETH's price movement presents two scenarios: a 5-month rectangle and an ascending wedge. The first scenario is that ETH rises above $2,960. The second scenario is that the collapse of the ascending wedge continues the downward trend, with ETH dropping to $1,650, which is the bearish target of the rectangle.

Bitcoin Exhibits a "Death Cross"

Anonymous cryptocurrency trader Mags wrote in an X post: "A death cross has appeared on the Bitcoin daily chart, with the 50-day moving average crossing below the 200-day moving average, indicating short-term weakness in the market." This is the second death cross since the bottom at $15,500. The last death cross occurred in September 2023 when the price was around $25,000. After that, the price consolidated for several weeks before reclaiming the MA, leading to a bullish cross and a strong upward rebound.

IG market analyst Tony Sycamore added: "Bitcoin needs to reclaim the 200-day moving average to stabilize and initiate a test of the resistance near the $70,000 trend channel."

However, trader Mags noted that the death cross could actually be a good sign. When this has happened in the past, Bitcoin's price increased by about 50% two times after four months.

In September 2023, the 50-day moving average crossed below the 200-day moving average when its price was $26,578. Just four months later, its price rose by 49% to $39,518.

In July 2021, the 50-day moving average was $34,671, while the 200-day moving average was $44,680. Similarly, just four months after the cross, Bitcoin's price increased by 54% to $54,813.

Despite Market Downturn, Positive Factors Continue to Emerge

Currently, it is understandable that bulls feel frustrated with recent trends, as positive catalysts continue to emerge, yet prices have not responded.

The first positive catalyst is the rebound in U.S. stocks. The stock market's rebound can be attributed in part to the almost certain Fed easing cycle. For more than two weeks, the short-term interest rate market has priced in a 100% probability that the Fed will begin cutting rates in September. Although past monetary easing policies have proven beneficial for cryptocurrencies, prices have yet to respond in this cycle.

Additionally, the U.S. inflation rate fell to 2.9% in July, marking the lowest annual inflation rate since 2021. Meanwhile, Morningstar's chief U.S. economist Preston Caldwell stated in a statement on Thursday that several analysts predict the Fed will implement "aggressive" rate cuts starting in September to stimulate the U.S. economy.

The U.S. market has also performed strongly recently, with the Nasdaq Composite Index rising 2.34% in the past 24 hours, while the S&P 500 and Dow Jones Industrial Average increased by approximately 1.61% and 1.39%, respectively. The Nasdaq and S&P 500 indices have now returned to levels prior to the panic in early August.

Another seemingly positive catalyst is the accelerating pace of institutional adoption of Bitcoin. Nate Geraci, president of ETF Store, stated that the latest batch of 13F filings (as of June 30) shows that there are 1,924 institutional holders of spot Bitcoin ETFs. Geraci noted that despite the decline in Bitcoin prices from April to June, this number is still higher than the 1,479 in the first quarter.

On the other hand, the number of publicly traded companies willing to leverage capital markets to increase their Bitcoin holdings is also increasing. Marathon Digital (MARA, which has been engaged in Bitcoin mining) raised $300 million in convertible bonds this week and immediately used the funds to purchase over 4,000 Bitcoins at a price of about $59,000 each. Medical device manufacturer Semler Scientific (SMLR, which announced its Bitcoin funding plan a few months ago) received approval from the U.S. SEC this week to proceed with over $150 million in financing, with the proceeds intended for purchasing more Bitcoin.