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Explained: Why is the crypto market crashing and what to expect next?

Explained: Why is the crypto market crashing and what to expect next?
Jordan
Major
4 months ago
6 mins read

When it comes to understanding the current volatility in the cryptocurrency market, there are various factors at play that add to the bearish sentiment. 

First and foremost, Friday, January 21, was the last day of the options expiration, which often results in a significant amount of volatility in the market. Previously, Finbold anticipated that Bitcoin might well see significant volatility based on derivatives data. 

According to the amount of open futures contracts at the time, considerable price volatility was on the horizon, which Bitcoin (BTC) experienced initially on Thursday evening heading into Friday.

“Futures markets remain a powder keg for short-term volatility with Perpetual Futures Open Interest at ~250,000 BTC- a historically elevated level,” according to data published from on-chain metrics platform Glassnode on January 17.

Tensions between Russia and Ukraine

Furthermore, investors will be keeping an eye out to see whether the buildup of tensions between Ukraine and Russia will have an impact on the price action of the markets in general in the coming days. 

Even so, it is vital to keep in mind that whatever the crypto market is experiencing may already be included in its valuation at this juncture. 

In addition, last week saw Russia’s central bank call for a total ban on crypto proposing that cryptocurrency trading, mining, and usage be made illegal. 

The report “Cryptocurrencies: Trends, Risks, Measures” states cryptocurrencies provide an outlet for individuals to withdraw their money from the national economy since they run the risk of weakening it and making the regulator’s job of maintaining optimal monetary policies more difficult to do.

As a result, if both China and Russia decide to ban cryptocurrencies totally, they will be two enormous economies whose citizens would be denied the opportunity to engage in this specific industry.

Equity Markets also in the red

Elsewhere, the equity markets are also facing a downturn, as seen by the Nasdaq; after momentarily recovering from the recent spike, the Nasdaq concluded the week in negative territory, down 2.72% on Friday after briefly rallying earlier on the day. 

Interestingly, the current sentiment on the Nasdaq equity market is weaker than that of the crash that occurred in March 2020, when the coronavirus pandemic started to have an impact on global markets.

When looking at the charts, one can see that the market is extremely bearish, with the blue line representing the real price action of the NASDAQ Composite and the red line reflecting the actual fear and bearishness in the market at this time.

Nasdaq market sentiment. Source: Hulbertratings

In addition, when looking at the overall sentiment evaluated by the Hulbert Nasdaq Sentiment Index, it is interesting to note that the current data point is -70%. In contrast, the low was -60% in the March 2020 crash, indicating that the current sentiment for the Nasdaq is now lower than at the height of pandemic market fear.

Financial analyst Mark Hulbert noted:

“Bearishness has fallen to such an extreme that it supports a significant stock market rally.”

Extreme Fear in the markets 

When combined with the NASDAQ sentiment, the Bitcoin Fear and Greed Index is at 13 – ‘Extreme Fear’ with the current price at $35,404 as of Saturday, January 22. 

However, this gauge could well go below 10 in the next few days as social media panic grows, in combination with more mainstream media coverage of the crypto market correction at this stage.

Fear and greed index. Source: alternative.me

The fear and greed index is based on various data points, including volatility, social media, and Google trends, among other things, with the information enabling the evaluation of an aggregated market sentiment.

Crypto market cap erases $350 billion in a day

Bitcoin and other cryptocurrencies have seen their value plummet by hundreds of billions of dollars as the precipitous drop in the cryptocurrency market continues to deepen.

Following a 12.02% drop in the previous day, the crypto market cap now stands at $1.62 trillion as of Saturday, January 22. As a consequence, the cryptocurrency market capitalization was reduced by $356 billion in a single day, falling from $1.98 trillion to $1.62 trillion in the process, which is a 5-month low.

On the charts, it can be seen that Bitcoin experienced the highest volume during the correction. Still, it can also be seen that the RSI is currently at its lowest point and most oversold since the actual crash in March of 2020 on a daily basis and that the previous lowest points were reached during the moves in September 2019 and November 2018.

Prominent crypto trading analyst Michael van de Poppe emphasized the point with the global crypto market:

“Total market capitalization is at the next level of support, while the daily RSI hits the lowest level since March 2020. Equities sentiment is also on the lowest level since March 2020. Says it all.”

Crypto market support level. Source: Michael van de Poppe

Next week will be a critical week to observe reaction on the markets; whether it is simply seeing a normal correction or whether it is going to have a deeper dive into the markets in which it will accelerate, and based on that, we are also seeing Bitcoin hanging on to a $35,000 support level that is critical to monitor.

Saylor and Bukele remain bullish on Bitcoin

Meanwhile, this year’s crypto market slump is being scrutinized by MicroStrategy CEO Michael Saylor, who thinks there are a number of contributing causes. 

“I think that there’s a lot of dynamics here. If you look at the entire crypto ecosystem, you have a set of regulatory uncertainty, especially regulatory uncertainty around stablecoins and crypto tokens and whether or not they’re securities. And that creates a little bit of anxiety,” the CEO revealed in a Bloomberg interview.

For institutions, Bitcoin is now at a “great entry point,” says Saylor, particularly given the fact that renowned investors such as Bill Miller have allocated a significant percentage of their portfolios to the flagship cryptocurrency recently.

He said:

“I feel like it’s consolidating at this level. This is a great entry point for institutional investors. <..> They see that it’s being embraced by people like Bill Miller, by very well-respected investors. It’s being embraced by the regulators, it’s being embraced by senators and congressmen and public investors and public companies. They are looking at this as like a good entry point.”

Despite the drop in the value of Bitcoin, Michael Saylor has no intention of selling his firm’s $5-billion stash. Likewise, El Salvador’s president Nayib Bukele revealed the country “bought 410 Bitcoin for only 15 million dollars.”

The most recent purchase is the cheapest transaction for El Salvador since the nation recognized Bitcoin as legal tender.

Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.

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Jordan Major
Author

Jordan is an investor and market analyst. He's passionate about stocks, ETFs, blockchain, and digital assets. At Finbold.com, he delves into the technicalities to obtain future trends for new market traders and gives insights into user-friendly platforms for beginners.

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