Bitcoin fell to the level of $85,000 on December 15 and continued the recent downward trend as global macro risks, the unwinding of leveraged positions, and low liquidity came together. This decline wiped out more than $100 billion in total crypto market capitalization in just a few days. That raises the question of whether the wave of selling is now over.
There was no single clear catalyst for this movement, but five overlapping factors pushed Bitcoin down and could cause further pressure on the price in the short term.
Fear of a Bank of Japan interest rate hike leads to global risk aversion.
The largest macro factor came from Japan. Markets moved ahead of a widely anticipated interest rate hike by the Bank of Japan later this week, which would raise Japanese interest rates to a level not seen in decades.
Even a small interest rate hike is important because Japan has been boosting global risk markets through the yen carry trade for years.
For years, investors have been borrowing cheaply in yen to buy riskier assets like stocks and crypto. Now that Japanese interest rates are rising, this trade is being unwound. Investors are selling risk assets to pay off their yen debt.
Bitcoin has reacted strongly in the past to previous interest rate hikes by the BOJ. In the last three cases, BTC fell by 20% to 30% within a few weeks. Traders anticipated this historical pattern and sold Bitcoin in advance of the decision.
US economic data once again creates policy uncertainty.
At the same time, traders withdrew from risk just before a series of US macro data, such as inflation figures and labor market statistics.
The Federal Reserve recently lowered its interest rate, but policymakers indicated caution regarding further easing. This uncertainty is significant for Bitcoin, which increasingly reacts as a liquidity-sensitive macro asset rather than a purely standalone hedge.
The inflation level is still above the target, and labor market figures are expected to deteriorate. This makes it difficult for the market to gauge what The Fed's next step will be. This uncertainty led to less speculative demand and encouraged short-term traders to step out of the market for a while.
As a result, Bitcoin lost momentum just as it approached important technical levels.
High leverage liquidations accelerated the decline.
As soon as Bitcoin dropped below $90,000, forced selling began.
More than $200 million in leveraged long positions were liquidated within a few hours, according to data from derivatives markets. Many long traders had entered after the recent interest rate cut by The Fed earlier this month.
When the price dropped, liquidation engines automatically sold Bitcoin to cover losses. This led to a further decline in price, triggering new liquidations in a kind of vicious circle.
This mechanical effect clearly explains why the decline was so rapid and sharp instead of gradual.
The timing of the sell-off made the situation even worse.
Bitcoin broke out during thin trading over the weekend, when liquidity is typically lower and order books are thin. In these circumstances, relatively small sell orders can cause the price to move sharply.
Large holders and derivatives experts reduced positions during low liquidity, which intensified volatility. This caused Bitcoin to be pulled quickly from the low $90,000 range to $85,000.
Such weekend declines often look severe, even if the fundamental situation in the market has not changed.
Market pressure was further increased by significant selling by Wintermute, one of the largest market makers in the crypto industry.
During the sell-off, on-chain and market data showed that Wintermute sold a large number of Bitcoin — estimated at more than $1.5 billion — through centralized exchanges. The company reportedly sold BTC to reduce risks and absorb losses after recent volatility and price movements in the derivatives market.
Because Wintermute provides liquidity on both the spot market and derivatives markets, their selling had an extra large effect.
The timing of the sales was also important. The activity of Wintermute occurred during circumstances with low liquidity. This exacerbated the declines and accelerated the drop in the Bitcoin price towards $85,000.
What happens now
Whether Bitcoin declines further now depends on the macroeconomic follow-up. Crypto-specific news is now less important.
If the Bank of Japan confirms an interest rate hike and global rates rise, the Bitcoin price may remain under pressure as carry trades are further unwound. A strong yen would further increase that pressure.
But if the markets have fully priced in this move and US data becomes weaker, increasing the likelihood of a rate cut in the US, the Bitcoin price may stabilize after the liquidation phase is over.
For now, the sell-off on December 15 shows a macroeconomic correction and no structural fault in the crypto market. Volatility is likely to persist for the time being.
