Early this morning, the crypto-market broke with the relative stability that had begun to characterize it in recent weeks. To the misfortune of some investors, it did it down. Shortly after 1:00 AM, the price of bitcoin dropped by almost 5% from 6,630 to 6,252 USD in just over an hour. This contrasts with the prior price range, which had been maintained between 6,500 and 6,800 USD since the end of September.
However, all the specialized crypto media and forums are struggling to provide an explanation for this phenomenon, which is common in the world of virtual currencies. No major announcements have been made recently enough in the industry to explain the abrupt downward movement. But is there a single clear and definitive explanation for this type of shock without a visible cause in a context of stability?
We can identify three main serious hypotheses, which are not mutually exclusive. In fact, it is more than likely that this morning’s event was due to a combination of all three, namely: the action of whales and bots followed by a domino effect; the failure of the higher resistance test; and the influence of the stock markets.
1st hypothesis: Low volume + (Whale +) bots + domino effect
Short, sharp changes in the bitcoin price are often attributed to either trading bots initiating a buy or sell order that then gets picked up by others, causing a domino effect on the price, or by so-called whales.
Brief and sudden variations in the price of bitcoin are often caused by trading bots that launched a buy or sell order that is then followed by others, thus causing a domino effect.
It can also be due to a large sell off by whales (owners of huge quantities of cryptocurrencies) but those are not an homogeneous group, and only part of them are active traders. They usually trade against the trend, buying on price declines.
The typical scheme is thus whales initiating sales, triggering the bots which in turn causes a massive sell-off. Then the whales will be able to buy back low and wait for the next rally to sell and make profits. The market is all the more sensitive and reactive when volumes have been very low for some time. Indeed, volumes are currently at their lowest level in 17 months.
For this reason and considering technical analysis, many analysts had predicted on October 10th a big move to come very soon, but with no certainty whether up of down since bitcoin price has been stable around 6,550-6,600 for some time.
2nd hypothesis: failure of resistance break out
Again based on technical analysis, the lack of volume coupled with the failure of bitcoin to break out of the 6,800 USD resistance level several times may have contributed to this sharp drop.
The bitcoin hit the peak of a long-standing resistance and couldn’t break out. Considering this persistent failure, both bots and investors placed their short positions at certain price points according to the evolutions on the charts in relation with this resistance level and the bears win.
To use the words of Redditor GuessParyGod, this is sort of a ‘self-fulfilling prophecy’ in a way since several individuals and bots are simultaneously analyzing the same charts and making the same conclusions almost all having the same idea about when to buy and sell. For this reason, the often questioned and criticized basic technical analysis remains necessary.
3rd hypothesis: influence of stock markets
Stock markets have experienced a serious fall since yesterday. Some crypto analysts express doubts as to wether stock markets and crypto-markets are correlated, but it is a fact that significant moves on stock markets have an impact on the latter.
What happened this morning probably has been triggered by market manipulators taking advantage of the negative sentiment caused by the stock market downturn. The main owners of cryptocurrencies also are large holders of other kinds of financial assets such as stocks. In the case of a stock market crash, investors need to liquidate their assets to pay their margin calls, and debts. A large part of digital coins are individuals’ « play money », to cite Redditor Subfolded, and those may likely need to liquidate it in the case of a recession or crash.
To conclude with, this morning, though no apparent cause could be identified in recent news, it is more than likely that a context of low volumes on crypto-markets and large sell-off on stock markets has created a negative sentiment exacerbated by a resistance-testing fatigue. This led market manipulators with large wallets to initiate a massive sell-off, triggering shorting by bots then people. Indeed, just before the drop, a wallet has been identified that sold 22.000 BTC, representing approximately 145 millions of dollars at the time.
This kind of factice dump will probably be followed by a rally: the bitcoin price has already recovered part of its value against the US dollar an hour after the drop, stabilizing again around 6,300 USD.