Bitcoin experienced a major repricing on August 17 and 18, losing around 10% in the hours between 4pm and 6pm ET. The price of bitcoin fell 8.8 percent from its opening price on Aug. 17 to as low as $25,244, according to data from Coinbase. The drop caused BTCUSD to break below the 200-day and 200-week moving averages. During and after the event, open interest in the perpetual futures market fell by approximately $2.75 billion, marking the largest Bitcoin deleveraging event since the FTX crash in early November 2022.
Many people have begun to speculate on the reasons for the sudden plunge of BTC. Some people believe that the reason for the decline in Bitcoin prices is that investors in the market have doubts about the prospects of cryptocurrencies, while others believe that this is just a market adjustment. a normal process. In this article, veDAO Research Institute will use some data and analysis conclusions to explain the reasons and predict the market trend.
Reasons for BTC’s fall
Hot market events
James Butterfill, director of research at CoinShares, tweeted his thoughts on the reasons behind the crash. He emphasized the market’s adjustment expectations for the U.S. Securities and Exchange Commission’s (SEC) approval of a Bitcoin ETF, indicating that approval is not expected to be immediate; he also expressed concerns about China’s economic decline and its potential deflationary effects. Additionally, Bitcoin’s transaction volume has decreased significantly, making the market more susceptible to larger transactions. Historical data also shows that low Bitcoin volatility often precedes large price movements.
Other news affecting BTC includes: A Wall Street Journal report on August 17 examined SpaceX’s financial statements and noted that SpaceX had financially written down a total of $373 million worth of Bitcoin and appeared to have made sales. On the same day, US housing finance institution Freddie Mac released data showing that the average interest rate on 30-year fixed mortgages in the United States rose to 7.09%, setting a record since April 2002; this may indicate that the broader asset class will also fall. Essentially, the price of Bitcoin is affected by various global and market factors, not just such key events.
On-chain data analysis
By observing some key on-chain indicators, it is not difficult to see that the real reason behind this plunge comes from the derivatives market, especially the large-scale leverage liquidation and liquidation of long positions, which ultimately led to a long squeeze.
First, by looking at Bitcoin balances held on major exchanges, we can see that there aren’t any large-scale inflows into exchanges. This means that on-chain holders are not putting their Bitcoin back on exchanges for sale, so the selling pressure is not coming from that aspect.
But based on the open interest chart, we can see a different story. Open interest refers to the number of open positions (including long and short positions) currently on a trading pair on a derivatives exchange. There was a big drop here, which means many traders have closed their positions. The vast majority of closed positions were long.
open interest
This event marked the highest long liquidation we have seen this year, with 5,694 contracts closed on August 17th. The last time we saw such a high number was on November 9 last year, when the number was even slightly higher and the price of Bitcoin fell by 27%.
Long position closing
As the chart below shows, the number of short positions that were closed was arguably insignificant in comparison.
From these charts, we can conclude that long traders were forced out of their positions, forcing them to sell, causing a cascading effect known as a long squeeze.
price analysis
There are two scenarios ahead at the macro level, but both point to the same short-term price action. As shown in the chart, we can consider the situation since November 21 of last year as a completed five-wave drive phase based on Elliott Waves. So now we are either seeing a three-wave correction phase; or we are seeing a larger five-wave move that will lead to an eventual bear market for BTC prices.
In the short term, a recovery from current levels is expected, most likely back to $28,000. This recovery is either a B-wave (three-wave correction) in the bullish case or a 2-wave (five-wave drive) in the bearish case.
Next, the price can be expected to recover from current levels, from which we can further verify which scenario will be the dominant one. If the bullish trend is at play, the price will head towards the 0.618 Fibonacci retracement level at $21,500. If the price falls below the 0.618 Fibonacci level, it may indicate that we are seeing the third wave of the five-wave driver phase, and the ultimate target to complete the pattern may be the next most important support area around $11,000.
Conclusion
The entire BTC market has been falling since August 17, but a rebound was soon to follow as the sharp drop occurred. However, this rally can only push prices up so far as the market structure hints at the start of a downtrend.
Historically, August and September have generally been less favorable for major cryptocurrencies. Nonetheless, BTC has shown considerable resilience during the bull market phase leading up to August. Although the history is similar, there are still changes brought about by the market environment. For example, the global policy environment, investor confidence, and the application of emerging technologies may have a significant impact on the value of BTC. When analyzing the trend of Bitcoin, it is still necessary to continue to pay attention to these key factors in order to more accurately predict the future direction of the market.
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