Down $10,000 In One Hour? What Happened to Bitcoin This Weekend?

Big flash crashes in bitcoin are nothing new, but this weekend’s trip below $42,300 highlighted what seems to be a growing trend in the first and biggest cryptocurrency’s day-to-day price fluctuations: it’s following the broader market’s reaction to world events.

So, what prompted bitcoin to collapse nearly $10,000 in an hour this weekend?

Well, worries about COVID’s fast-spreading omicron variant have been building (although now there are signs the actual illnesses it causes are less severe), Federal Reserve Chairman Jerome Powell’s growing concerns about inflation suggested the bond-buying stimulus policy may be unwinding faster than expected, China’s Evergrande crisis is coming to a head, etc.

All of which shows a growing trend toward trending in bitcoin. Which wasn’t supposed to happen as bitcoin became more mainstream and big hedge funds and other institutional investors moved more openly into crypto.

Bitcoin is a “store of value” just like gold now, according to Wall Street, and those are supposed to be resistant to short-term market trends. So the narrative goes.

On Friday (Dec. 3) — a day before the entire crypto market stepped off a cliff — SoFi Head of Investment Strategy Liz Young told Bloomberg that while the crypto industry sees bitcoin as low-risk compared to other cryptocurrencies, the mainstream investment community views “bitcoin as a high-risk option in the broader investment landscape. So it’s all about your perspective and your comfort level.”

In an investor’s note on Sunday, Sean Farrell, Fundstrat’s head of digital asset research, pointed to the far faster recovery of the rest of the crypto market compared to bitcoin — as of Monday morning, BTC was down 16% over the past seven days, as opposed to ETH’s 7%.

“The rest of the crypto market recovers at a much faster pace than Bitcoin,” he wrote. “[That] speaks to the overwhelming level of institutionalization of Bitcoin over the prior 12 months.”

Farrell also pointed to “legacy institutions” attempting to “preserve their numbers annual gains” numbers as a reason for the sell-off.

Inside Baseball Matters

Of course, there were also internal crypto industry factors at play.

There were signs that there was too much leverage in the market — 100x is not unusual in crypto derivatives, although that’s beginning to change — and a decline over the weekend caused a wave of liquidations, which can turn into a vicious cycle very quickly.

But there’s another factor at play that isn’t the case with “normal” traditional markets. Simply put, Bitcoin’s price has been basically level for too long for something dramatic not to happen.

Bitcoin’s price has been largely stable for more than two weeks now, hovering in the $56,000 to $57,000 range since falling below $60,000 in mid-November.

The excitement about the Securities and Exchange Commission (SEC) approving bitcoin ETFs — but only futures-based ETFs — has passed.

Bitcoin remains a wildly volatile market, and flat prices simply don’t last. While this weekend’s drop was bigger than usual, 5% to 7% rises and falls in a day are not exactly unusual for bitcoin.

And until traditional investors, both institutional and the growing number of new retail buyers, get used to that — or it changes as bitcoin becomes more mainstream — it will continue to be magnified by fear of missing out (FOMO is a popular term in crypto circles) and fear, uncertainty, and doubt (FUD is another).

Take a look at ether and other alt-coins. While they rise and fall wildly as well, the core dynamic remains utility. Is there a use case for those coins?

While ether has been on a wild ride this year it’s up 450% year-to-date, the so-called “Ethereum killer” blockchains like Solana and Polygon that do what Ethereum does without the staggeringly high transaction fees and congestion are up around 10,000%.

Bitcoin? Just 65% after this weekend’s crash. A wild ride for the mainstream markets just isn’t that wild for bitcoin.