Blame Fed and Leveraged Traders for This Crypto Selloff
Markets ranging from global technology stocks to crypto took a major hit over the past day, after a release of minutes from the last US Federal Reserve (Fed) meeting revealed a more hawkish stance than the market had expected.
7-day price of BTC:
7-day price of ETH:
The drop in cryptoassets came as US stock markets also moved lower, with the technology-heavy Nasdaq index down by 3.12% for the day on Wednesday. At the same time, the broad S&P 500 index ended the day down 1.94%, its biggest one-day drop since a major sell-off on December 1.
As of Thursday morning (10:09 UTC), some stock indexes were already recovering, with for instance Hong Kong’s technology-focused Hang Seng Tech Index up by 1.37%, and US S&P 500 futures nearly unchanged for the day.
The large moves in the markets came after minutes from the Fed’s last meeting on December 14 and 15 showed that the central bank had discussed a tightening in monetary policy and rate hikes in order to fight inflation.
Explaining why the minutes led to such a strong move, Mike Loewengart, managing director of investment strategy at E*Trade Financial told Bloomberg that the minutes revealed “a more hawkish Fed than some may have expected.”
Commenting on the sharp sell-off in crypto in particular, Matt Dibb, Chief Operating Officer of the Singapore-based crypto fund distributor Stack Funds, told Reuters today that the fall “correlated with the ‘risk off’ move across most traditional asset classes,” while pointing to a drop in the Nasdaq index as especially important.
As is usual during major crypto market sell-offs, large liquidations followed. According to data from Coinglass, more than USD 424m in long trading positions got liquidated across the crypto market during the four hours from 20:00 yesterday to midnight UTC time. Out of that, USD 177.6m of long positions were liquidated in bitcoin alone.
The de-leveraging over the past 24 hours followed warnings from analysts at Arcane Research as recently as this week that rising leverage combined with low volatility means that the market “seems ripe for a move” in either direction.
Commenting on the crypto sell-off, crypto exchange FTX CEO Sam Bankman-Fried said he does not see the move as specific to crypto. “Everything is down today; equities are probably leading crypto,” the exchange CEO said.
On a similar note, Zhu Su, CEO of crypto hedge fund Three Arrows Capital, also attributed the crypto sell-off to a move that started in the stock market. “Tech stocks fell most in 10yrs, can't control that,” the popular crypto investor said when confronted with an earlier prediction that the bottom was already in for crypto.
Meanwhile, the market crash also came at a time when some in the crypto community had worried that selling pressure from Asia would push the market lower. The selling is believed to have been caused – at least in part – by Chinese traders forced to withdraw funds from some crypto exchanges and peer-to-peer marketplaces ahead of a December 31 deadline.
With 2021 now behind us, data shared by bitcoin analyst at mining firm Blockware Solutions, Will Clemente, showed that selling during Asian business hours has already decreased substantially.
The data was confirmed by another analyst, who said that selling pressure over the last month has mostly been seen during US and European working hours.
"For a few weeks now, we’ve been clearly in a downtrend and there are no signs of a decisive reversal in sight. However, striking similarities between the current price action and the market moves between mid-May and August do give reasons for cautious optimism in the medium term," Mikkel Morch, Executive Director & Risk Management at crypto/digital assets hedge fund ARK36, said in an emailed comment.
According to him, a bounce to around USD 47,000 per BTC in the next few days could corroborate that thesis while further losses would largely invalidate it.
"In any case, only a clear break above USD 50,000 would signal a major reversal in the trend and investors should keep in mind the inherently volatile nature of the digital asset market," Morch stressed.
Also on a positive note, the independent crypto researcher Mira Christanto said that the latest sell-off does not signal that crypto will be in a bear market in 2022.
“The market has now priced-in that the Fed is reducing its balance sheet size. Bullish if there's any easing, bearish if there's further tightening,” she said.
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(Updated at 10:52 UTC with a tweet from Alex Krüger. Updated at 13:02 UTC with comments from Mikkel Morch. Updated at 13:41 UTC with reactions.)