Key Takeaways
- Bitcoin declined by 13% at its lowest wick from yesterday, August 17
- The crash was caused by a long squeeze
- A bounce to $28,000 is expected shortly
The cryptocurrency market has been in the red today, August 18, with a major crash happening across the crypto space. Bitcoin’s price came down by 8.8% from its August 17th open and reached $25,244 on its lowest wick, according to Coinbase data.
Many have speculated as to why the market started crashing suddenly, and there are some factors that stand out. In this analysis, we are going to cover these reasons but also point out where the market could be headed next.
Reasons Behind The Crash
James Butterfill, the head of research at CoinShares , has taken it to Twitter to discuss his reasoning behind the crash.
He highlighted the market’s adjusted expectations regarding the SEC’s approval of a Bitcoin ETF, indicating that approval wasn’t immediately expected. He also pointed to concerns over China’s economic downturn and its potential deflationary effects.
Additionally, Bitcoin’s trading volume has reduced significantly, making the market more reactive to larger trades. Historical data also suggests Bitcoin’s low volatility often precedes sharp price changes.
Though SpaceX’s recent BTC financial move played a part, other factors, such as rising 30-year rates, may indicate an impending broader asset class crash. In essence, Bitcoin’s price is influenced by various global and market factors, not just headline-grabbing events.
Looking at some key on-chain metrics, we can say that the real reason behind this crash comes from the derivatives market, namely a large leverage flush and long position liquidations – long squeeze.
First, looking at the Bitcoin balance held on major exchanges, we can see that there wasn’t any significant inflow to exchanges. This means that on-chain holders haven’t put back their BTC on exchanges in order to sell, so the selling pressure hasn’t come from this side.
But looking at the open interest chart, we can see a different picture. Open interest stands for the number of open positions (both long and short positions) currently on a derivative exchange’s trading pairs.
A sharp decline occurred here, meaning that many traders have closed their positions. The closed positions are definitely the vast majority of longs.
This event marked the highest long liquidation we have seen this year, with 5694 long positions closed yesterday. The last time we saw this high of a number was November 9, when this number was even slightly higher, and the price of Bitcoin crashed by 27%.
In comparison, the number of short positions closed was insignificant, as seen in the chart above. From these charts, we can conclude that long-position traders were stopped out, forcing them to sell, which caused a cascading effect known as the long squeeze.
Price Analysis
There are two scenarios on a macro level ahead, but both point to the same near-term price action.
As we have seen the completion of the five-wave impulse from November 21, now we are either seeing the first major bull market ABC correction, or the larger five-wave move that is going to lead the price of Bitcoin into its final bear market low.
In the short term, a recovery will be expected starting at the current level, and most likely back to $28,000. This recovery would be either a B wave in a bullish scenario or wave 2 in a bearish scenario. With the RSI signaling extreme oversold conditions on the daily chart, we could expect this recovery to start anytime soon.
Next, we would be expecting the third descending move from which we can further validate which scenario would be the primary one. If the bullish one is in play, then the price is headed toward 0.618 Fibonacci retracement level at $21,500.
Alternatively, if the price goes below the 0.618 Fibonacci level it could indicate that we are seeing wave 3 from the five-wave pattern and the ultimate target for the completion of this pattern could be at the next most significant support zone around $11,000.
Conclusion
The whole market has been in a freefall since August 17, but as the sharp decline was made, a bounce would be expected shortly. However, this bounce can only take the price so far as the market structure implies the starting downtrend.
The first optimal target for the completion of this decline would be $21,500 in a bullish case, but the next one is much lower, at the $11,000 zone, in a bearish case.
Disclaimer
Please note that the contents of this article are not financial or investing advice. The information provided in this article is the author’s opinion only and should not be considered as offering trading or investing recommendations. We do not make any warranties about the completeness, reliability and accuracy of this information. The cryptocurrency market suffers from high volatility and occasional arbitrary movements. Any investor, trader, or regular crypto users should research multiple viewpoints and be familiar with all local regulations before committing to an investment.
