Behind the ugly crypto weekend, cascading sales and dashed hopes for Bitcoin $ 100,000

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“Hodl” more?

The ominous weekend cryptocurrency bashing that dragged Bitcoin (BTC) below $ 50,000 and ravaged other digital coins decisively dampened investor optimism – some predicting a run to 100,000 $ just a few weeks ago.

Fueled by uncertainty over the Federal Reserve gradually heading for tight monetary policy in the face of soaring inflation and global fears over the new Omicron variant of COVID-19, the dramatic crash was supercharged by liquidations in the crypto derivatives market, according to market participants.

On Friday alone, Bitcoin was above $ 57,000 before stock-hammering risk aversion spilled over into the crypto world – dropping the first digital coin by 20% on the day to below 43,000 $. On Sunday, the currency rebounded more than 2% to trade around 49,000.

According to estimates by Larry Cermak of The Block Research, nearly $ 5 billion in open interest was wiped out in just half an hour. This helped reduce the cryptocurrency’s total market cap to around $ 2.3 trillion, down sharply from last month’s record of over $ 2.6 trillion.

In parts of the market, the price of BTC has slumped even lower, with some exchanges pegging it at $ 28,000 according to Jason Lau, COO of the cryptocurrency exchange Okcoin.

“As is generally the case, cascading liquidations in derivative markets have resulted in exaggerated moves,” Okcoin’s Lau explained.

Since fewer people typically trade on weekends, crypto markets often face much lower levels of liquidity, offering even less protection against dips. Lau and investors say thin market conditions fueled the carnage in price action on Saturday.

On Sunday, some cryptocurrencies recovered a bit of lost ground. Ether (ETH-USD) has plunged more than 20% but has recouped some losses, currently hovering around $ 4,100. Smaller blockchain units where liquidity is even lower, like Solana (SOL1-USD), also experience a net correction of 20%.

The story continues

Yet against the trend is Terra’s Luna (LUNA1-USD) – a stable coin-backed token that has seen the biggest crypto gains in recent weeks. Up more than 10% on the day, Luna turned her initial drop into a weekend bull run that records back-to-back all-time highs.

“Gone south”

Between Friday and Saturday morning, the first cryptocurrency crashed from $ 57,000 to around $ 45,000.

This weekend’s sale is just the latest in several flash crashes this year that have rocked some investors, even as Salvadoran President Nayib Bukele – whose country became the first sovereign government to adopt Bitcoin as legal tender. – proclaimed that he “bought the drop. “

The ‘buy down’ philosophy is driven by the belief of Bitcoin investors that no matter what the downside, the asset will continue to rise in the long run, thanks to governments spending freely and relaxed monetary policy that triggers l ‘inflation.

“Fundamentally, further monetary expansion and declining purchasing power is not going away and will only spark more interest in scarce assets like bitcoin,” Okcoin’s Lau told Yahoo Finance.

But short-term sentiment around the asset has clearly changed. According to Anto Paroian, COO of ARK36, a crypto hedge fund, Bitcoin experienced “violent swings” of 20-30% in previous bull races before reaching its peak.

Yet this time around, BTC’s 20-week moving average – a key indicator of the bull market – “has now been decisively broken,” Paroian told Yahoo Finance, warning that “the outlook is currently bearish at short and medium term ”as some investors look at it. get rid of their riskiest assets.

With Fed Seeming More Concerned About Inflation And Widening Omnicron Fears, Investors Pull Back In Hopes Of Bitcoin To Hit $ 100,000 – A “Long-Overdue Milestone,” Says Baxter Hines, Chief Investment Officer of Honeycomb Digital Investments, based in Texas.

The Bitcoin rally was fueled in part by borrowed money or leveraged positions on derivative exchanges, with some using the digital coin as margin collateral. As such, a heavily leveraged market is vulnerable to shocks that exacerbate violent moves.

In the last quarter, money stuck in decentralized funding protocols topped $ 100 billion, according to DeFi Pulse, a fourfold increase since the start of the year.

And when crypto prices “went south” on Friday, so did guaranteed loans to derivatives traders, Hines pointed out – increasing margin calls forcing traders to liquidate their positions to cover. losses, as well as volatility.

With open interest already falling sharply, the drop could worsen at the start of Monday’s regular session. This is because the Chicago Mercantile Exchange (CME), which represents an increasing level of open interest volume on BTC futures, does not operate on Saturdays.

“It will be interesting to see what happens when Monday rolls around,” Lau added.

David Hollerith covers cryptocurrency for Yahoo Finance. Follow him @dshollers.

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