Bitcoin fell to the $85,000 mark on December 15. The recent downward trend has been exacerbated by global macroeconomic risks, the unwinding of leverage, and low liquidity. As a result, over $100 billion has evaporated from the total cryptocurrency market capitalization in just a few days, leading investors to question whether the decline has ended.
There was no single factor that triggered the decline. A confluence of five forces dragged down the Bitcoin price, which may continue to put pressure on the price in the short term.
Concerns about the Bank of Japan's interest rate hike… Global risk reduction
The largest macroeconomic cause originated in Japan. The market moved ahead of the Bank of Japan's scheduled interest rate hike this week, which is expected to raise Japan's policy rate to levels not seen in decades.
Even a small increase is important because Japan has been supplying funds to the global risk asset market for a long time through yen carry trades.
For a long time, investors borrowed low-interest yen to buy high-risk assets like stocks or cryptocurrencies. When Japanese interest rates rise, these trades enter a correction phase. Investors sell risk assets to repay yen debt.
Bitcoin has historically reacted sensitively to interest rate hikes by the Bank of Japan. In the last three rate hikes, Bitcoin's price dropped by about 20% to 30% in the following weeks. Traders preemptively lowered Bitcoin's price reflecting these past patterns even before this decision.
US economic indicators, policy uncertainty resurfaces
At the same time, traders reduced their risks ahead of the release of major US macro indicators, which include inflation and labor market indicators.
The Federal Reserve recently lowered interest rates, but officials have taken a cautious stance regarding the pace of future easing. This uncertainty significantly affects Bitcoin. Bitcoin is increasingly traded as a macro asset sensitive to liquidity.
Inflation is exceeding target levels, and employment indicators are expected to weaken, making it difficult for the market to predict the Fed's next move. This hesitation has reduced speculative demand, and short-term traders have stepped back.
As a result, Bitcoin lost its upward momentum when it reached a major technical resistance level.
High leverage liquidations accelerate the decline
A forced sell-off occurred as Bitcoin fell below $90,000.
According to derivatives data, over $200 million in leveraged long positions were liquidated within hours. Following the recent Fed rate cut, long traders had heavily bet on price increases.
As the price fell, the liquidation system automatically sold Bitcoin to cover losses. This sell-off caused the price to drop faster, leading to further liquidations in succession.
This mechanical phenomenon has caused the decline to unfold rapidly and sharply rather than gradually.
The timing of the decline also worsened the situation.
Bitcoin generally showed a decline during weekend trading when liquidity is low and bids are shallow. Under such conditions, even relatively small sell orders can significantly move the price.
Large holders and derivatives trading desks reduced their positions during periods of low liquidity, increasing volatility. This trend quickly pulled Bitcoin down from the low $90,000s to around $85,000.
Weekend drops can often appear dramatic, even if the fundamental conditions of the market do not change.
The stress in market structure has been further exacerbated by Wintermute's large-scale sell-off, a major market maker in cryptocurrency.
On-chain and market data during the decline indicate that Wintermute has been detected selling a significant amount of Bitcoin, worth $1.5 billion, on centralized exchanges. The company is estimated to have sold Bitcoin for risk adjustment and exposure cover following recent volatility and losses in the derivatives market.
Since Wintermute provides liquidity in both the spot and derivatives markets, their sell-offs have had a significant impact on the market.
The selling point was also important. Wintermute's sell-off occurred during a period of low liquidity, which exacerbated the decline and caused the price of Bitcoin to drop rapidly to $85,000.
What’s the next development?
Whether Bitcoin's price will fall further now depends not on cryptocurrency-specific news but on the macroeconomic environment.
If the Bank of Japan confirms an interest rate hike and interest rates rise globally, carry trade unwinding may follow, continuing to put pressure on Bitcoin's price. If the yen strengthens, the burden increases.
However, if the market sufficiently reflects these measures and US economic indicators weaken, reviving expectations for rate cuts, Bitcoin's price may stabilize after the liquidation phase ends.
The selling pressure on December 15 is an adjustment due to macroeconomic factors rather than structural problems in the cryptocurrency market. However, volatility does not seem likely to disappear easily for the time being.
