The Why Behind Bitcoin’s Recent Price Correction
Bitcoin’s recent selloff has been dragging on for five months, reaching just over a 50% correction. A simple explanation lies in supply and demand mechanics: since there was more Bitcoin supply to the marketplace than demand for it, the price fell.
But this would only paint half the picture. In addition to a technical explanation, it is important to identify fundamental drivers of price and how they affect the market’s macro narrative.
One surface reason is China’s publicity war on cryptocurrencies. China has always embodied a contradiction in cryptocurrencies, controlling 70% of Bitcoin’s hash rate, and simultaneously banning cryptocurrency-based transactions. A part-of the selloff likely links to China’s recent crackdown on exchanges just as it did in Q4 2017 when China clamped down on the ICO boom.
This leads to a second reason: liquidity is drying up. In addition to Chinese exchanges halting their services, which reduces liquidity, it also appears to be evaporating from margin exchanges based elsewhere (e.g., Binance based in Malta). Consequently, the volume decreases, making it easier for whales to use margin and manipulate the market.
The BTC/USD spread on major exchanges: as the spread increases, liquidity decreases because fewer people are trading.
With Bitcoin’s market cap sitting at around $135 billion and gold’s hovering around $8 trillion, it is evident that whales find it easier to manipulate the former (not to mention the underdeveloped regulatory framework facilitating manipulation).
The extent to which Bitcoin’s recent sell-off stems from manipulation is debatable, though it would be naïve to disregard its impact. Overall, it is important to stay realistic and not get carried away by the FOMO. The exit from the accumulation range between $3.1K and $4K in March 2019 was one of the fastest in Bitcoin’s price history. It broke out in just 4.3 months, whereas it took almost one year to break out in the previous cycle.
As long as the total cryptocurrency market cap holds between $185 and $200 billion, this selloff could have already reached its bottom. However, if it breaks lower, it would signal bearish control, setting up the conditions for a further selloff. In such times of uncertainty, it is judicious to keep in mind the words of legendary commodities trader Jesse Livermore: “money is made by sitting, not trading.” Stick to the game plan, do not FOMO!