Bitcoin and a wide range of cryptocurrencies have experienced a series of sharp price falls at the beginning of a month that many market commentators believed would be a lucrative one for the crypto market.
With BTC shedding $10,000 of its value in a 14-hour period, it’s worth questioning what’s next for coins across the entire ecosystem, and whether this latest action signals the end of the bull market.
The bullish sentiment toward Bitcoin was shared far and wide after the cryptocurrency broke its all-time high in October and early November. Notably, market analysts at Standard Chartered, among many others, predicted that BTC could reach the dizzying heights of $100,000 in 2021 –potentially triggering a wider market move that would see other assets also rally to new highs.
Key drivers of this bullish sentiment included the arrival of Bitcoin’s own exchange-traded fund and El Salvador’s government adopting the cryptocurrency as legal tender.
However, following a slightly disappointing November the price of BTC fell sharply in the opening week of December in a crash that triggered dips across the crypto ecosystem.
As the chart above shows, Ethereum also suffered a drop of around 20% in the wake of Bitcoin’s price fall. The drop in the value of ETH was especially disappointing as the coin had also recently broken its all-time high in early November.
In the case of both BTC and ETH, the assets have struggled to recover their values in the immediate aftermath of the dip, with trading volume waning around 24 hours after the initial price crash.
Warning of a potential market crash in November, Maxim Manturov, head of investment research at Freedom Finance Europe, said,
“There is a risk to ‘run up against’ FOMO, which together with substantial volatility inherent to crypto assets can lead to a reasonably strong pullback in case of a decreased risk appetite and the absence of a breakout of the inclined channel. Therefore, one should be careful at current levels and understand the speculative nature of such assets.
“Overall, the recent Bitcoin rally reflects the broader use of the coin as a hedge against inflation and the availability of enormous liquidity in the markets due to low rates and QE (qualitative easing).”
But what has actually triggered the cryptocurrency market’s current decline? And is it still possible for assets to recapture the bull run that saw many coins break their all-time high values in early November?
Why are cryptocurrencies falling?
Bitcoin began falling on Friday, December 3, 2021, in the wake of a larger pullback across the stock market, leading to investors diverting their holdings into treasuries. On Wall Street, higher-risk tech stocks were among the biggest strugglers, with Tesla losing around six-percent of its value. Furthermore, the ARK Innovation fund lost five-percent around the same time and 12% across the week as a whole.
Despite there being no clear trigger for the cryptocurrency collapse, it appears likely that the lower sentiment across tech stocks led to investors opting to unload their crypto assets also.
J.C. Parets, chief market strategist for All Star Charts, said,
“The evidence points to this being yet another derivative-induced selling event. The September flash crash had the same drivers as this sell-off leverage was flushed from the system in a violent fashion, which later enabled the market to eventually move higher toward a new all-time high in October.”
Parets’ words appear to indicate that this may not mean the end of the cryptocurrency bull run over the long term. But could we see a turnaround in fortunes within Q4? Or could BTC have a strong start to 2022 ahead?
Can we expect a recovery in 2021?
Despite Bitcoin shedding $10,000 from its value in a matter of hours, Shiliang Tang, chief investment officer at LedgerPrime, a cryptocurrency investment management firm, believes that the market’s latest fall was a net positive for BTC’s future price action.
Tang said,
“This dip certainly tracked the fall in equity prices that we’ve seen as a result of Covid-19 fears and concerns about inflation. However, while crypto and equity markets do tend to fluctuate in tandem, they are different markets and crypto, in particular, is in a strong bull cycle.
“Moreover, the on-chain metrics for Bitcoin the king crypto to track in a bull run are still strong. There are more coins getting taken off [of] exchanges than flowing onto them. This means that once this flushing out finishes, we should see a supply shock in which the price of Bitcoin explodes upwards.”
Although there’s been little evidence of such explosive growth emerging in the wake of early November’s price rallies, a large-scale selling event may have been necessary to spark a cleansing process across the cryptocurrency market.
Tang added,
“If anything, this dip did more to wash out those cowboy leverage traders and in turn set up healthier conditions for continued price rises in the near future.”
Time is slowly beginning to run out in a month that promised so much for Bitcoin’s price activity. With many analysts pinpointing Q4 as the stage for the cryptocurrency’s final seismic rally for the coin’s third halving event, investors may be eager to look out for signs of life before trusting that a price recovery is on the cards.
Though, with the backdrop of widespread inflation and the ongoing Covid-19 pandemic continually impacting traditional stocks and shares, the dream of BTC valued at $100,000 may have to wait a little longer.
Dmytro Spilka is a finance writer based in London and the founder of Solvid and Pridicto. His work has been published in Nasdaq, Kiplinger, Financial Express, VentureBeat and The Diplomat.
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