Capitulation in the Bitcoin market – these are the reasons

The crypto market corrects significantly at the end of the week. Today, January 21, prices are falling by double-digit percentages. Lead currency Bitcoin, for example, was trading at $38,900 at the time of writing – and thus cannot maintain the long-standing support at $40,000. Expressed as a percentage, the oldest cryptocurrency corrects by 7.6 percent on a weekly basis.

Things aren’t looking much better in the altcoin sky. The second-largest cryptocurrency by market cap, Ethereum (ETH), even tumbled 8.8 percent. An ether is currently available for USD 2,891. In the top 10, Solana (SOL) is the hardest hit, down 10.1 percent over the past 24 hours.

These are the reasons for the slide in prices

With the break of the $40,000 mark, Bitcoin loses an important support level. Most recently, the cryptocurrency had traded in a range between USD 40,000 and USD 42,000 for weeks – but the trading range had recently narrowed, which is why a breakout in one direction or the other was considered a likely scenario by market observers.

However, yesterday, Thursday, January 20, Bitcoin initially broke northwards.

“The bitcoin correction was also reinforced by the false breakout to the upside. It was then negated and that usually means increased movement in the opposite direction,” says BTC-ECHO market analyst Stefan Lübeck.

Stock market turbulence sweeps bitcoin away

However, price analysts see the turmoil on the global financial markets as the main reason for the slump. Leading indices like that Nasdaq 100 been reeling for weeks. Calculated over seven days, the world’s most important tech index is a whopping 7 percent in the red. In a $15 trillion market, a correction of this magnitude means billions upon billions of dollars are washed out of the market.

Nasdaq 100. Source: TradingView.

Another example of the general uncertainty on the market, if not panic, is the US streaming service Netflix here. The company’s shares are currently down around 25 percent (in pre-market trading, mind you). The reason for this are sobering quarterly figures and stagnating growth prospects; the competition from Disney + says hello.

Netflix stock price. Source: TradingView.

Recently, the correlation of the crypto market with traditional assets such as the Nasdaq has increased. In the past, bitcoin and co. were still guarantors of diversification, but today the markets are increasingly running in tandem.

Most recently, the crypto market shows a strong correlation with stock indices such as the SPX and the Nasdaq100. The latter corrected sharply in after-hours trading when Netflix’s latest earnings results were released. The stock is down around 25 percent on a daily basis.

BTC ECHO analyst Stefan Lübeck

The correlation does not only apply in one direction. Again International Monetary Fund (IMF) recently in one study had announced, the notorious Bitcoin volatility leads to so-called “spillover effects”. Accordingly, the high BTC price fluctuations during the Corona crisis would have had a tenth of the return fluctuations of the S&P 500 turned off.

From this, the authors conclude that “systemic risks” even arise from the Bitcoin volatility and call for broad regulation. In other words: Bitcoin is growing up and gaining geopolitical weight.

The volatility on the stock market is primarily due to the hearty change of course by the US Federal Reserve fed justified. What is probably the most important central bank in the world had announced a significantly more restrictive monetary policy for this year, which even includes interest rate hikes this year. More on that here.

Uncertainty also on the part of politics

But that’s not enough negative headlines for the crypto markets. In addition, we received the news yesterday that the Russian central bank intends to take a much tougher stance against Bitcoin and Co. The sale of cryptocurrencies for fiat money in Russia is to be completely banned – that would de facto kill the exchanges there. Mining should also be banned. The last one is particularly piquant, as the Russian Federation is the third largest mining nation in the world after the USA and Kazakhstan.

According to a report by the central bank, only the possession of cryptocurrencies should remain permitted. In short: You have “currently a very heterogeneous situation. Be it on the stock exchange, be it in politics,” says Stefan Lübeck.

And now?

The future is uncertain. This applies equally to the crypto market and the traditional financial markets. But perhaps it took exactly this Bitcoin capitulation event to flush built-up leverage positions and “weak hands” out of the market. And there is one bright spot: The support at $39,000 seems to be quite stable so far.

As long as bitcoin is trading above $30,000, the cryptocurrency will rank above the last local bottom from July of last year. So the bull market would still be intact.

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