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"Just woke up. WHO SOLD?"

This was Reetika's initial thought as she followed her regular morning ritual of checking cryptocurrency prices upon waking up; she's a Bitcoin (BTC) and crypto trader based in Dubai.

A sudden and significant downturn in the cryptocurrency markets took everyone by surprise following a period of uneventful weeks. The abrupt and substantial losses left Reetika, along with traders and cryptocurrency enthusiasts worldwide, astonished due to their unexpectedness and severity.

 

 

On Thursday, Bitcoin experienced a significant decline as traders collectively offloaded their holdings due to a combination of unrelated factors. This resulted in a substantial 6.7% reduction in the overall capitalization of the cryptocurrency markets. The event marked one of the most significant drops observed in recent months.

Around 06:00 UTC on Friday, Bitcoin experienced a notable drop of up to 9% within the previous 24 hours, bringing its value down from $28,500 to $25,000 on the Binance platform. This decline triggered a widespread market downturn, resulting in significant decreases for major tokens such as Litecoin (LTC), which plummeted by 14%. Consequently, this led to the liquidation of crypto futures surpassing $1 billion, marking a peak not seen in the past 14 months.

Around 06:00 UTC on Friday, Bitcoin experienced a notable drop of up to 9% within the previous 24 hours, bringing its value down from $28,500 to $25,000 on the Binance platform. This decline triggered a widespread market downturn, resulting in significant decreases for major tokens such as Litecoin (LTC), which plummeted by 14%. Consequently, this led to the liquidation of crypto futures surpassing $1 billion, marking a peak not seen in the past 14 months.

Certain individuals alluded to unsubstantiated allegations of SpaceX, a space exploration company, engaging in bitcoin sales as a potential factor, while others linked the decline to the potential bankruptcy of China Evergrande. However, it is important to note that neither of these occurrences is likely to be the underlying cause.

A recent report from The Wall Street Journal, referencing internal company records, highlighted that SpaceX, led by Elon Musk, had reduced the valuation of its bitcoin assets in both 2021 and 2022 and subsequently divested from the cryptocurrency. However, it's important to note that this report was published prior to the recent market decline, and there is no substantiated information to confirm any additional sales by the company on the most recent Thursday.

Long squeeze and what really happened

Market experts attribute the abrupt decline more to market structure and liquidation events rather than a single fundamental trigger, according to seasoned traders. The market has also demonstrated a state of relative illiquidity and stability, setting the stage for the potential occurrence of sudden and significant price shifts.

“We've seen BTC [open interest] ramp up in position, with a bias to shorts,” said Decentral Park Capital trader Lewis Harland, in a message to CoinDesk. “The break below $28,500 led to material volumes of longs being liquidated. This has been combined with spot selling ahead of the date (likely anticipating further delays).”

Open interest pertains to the quantity of outstanding futures contracts for a given financial asset. In a stable market, the swift accumulation of a substantial number of futures positions occasionally triggers swift price declines if a prominent participant initiates a substantial sell-off.

This occurs because when prices decrease, long traders are compelled to offload their positions in order to prevent liquidation. This not only contributes to heightened selling pressure but also initiates an unending cycle of declining prices and the need to cover long positions simultaneously.

The majority of extensive sell-offs occurred within the crypto exchange OKX, constituting nearly 40% of the total market's liquidations as indicated by data.

 

Some primary drivers, though, include the increasing interest rates in the United States, as stated earlier.

“U.S. interest rates are rising to multi-year highs. The 10-year yield has pushed to 15-year highs. This is bearish risk assets in general,” Harland added. “If this sell-off in bonds continues we could see continued negative price action in risk assets into the weekend.”

In other reports, experts from the on-chain data platform CryptoQuant informed CoinDesk that they anticipate a persistently bearish sentiment in the upcoming days. This is attributed to the rise in funding rates among short traders, who are essentially investors betting against price increases.

 

Funding rates involve intermittent payments that traders execute according to the price variations between the futures and spot markets. Depending on their active positions, traders will either make payments or receive funding. These payments play a crucial role in maintaining a balanced presence of participants on both ends of the trading spectrum.

Elevated rates can result in greater price volatility, since traders are motivated to take positions predominantly on one side of the market. This, in turn, amplifies movements in both the futures and spot markets.

In the meantime, traders are in anticipation of a Grayscale court verdict regarding the approval of an exchange-traded fund (ETF), a decision that is widely anticipated to be disclosed on Friday.

The imminent release of a federal appeals court's decision regarding the long-standing Grayscale vs. SEC dispute holds the key to determining the validity of the U.S. Securities and Exchange Commission's (SEC) multiple rejections of Grayscale's bitcoin ETF proposal. Should the ruling favor Grayscale, it is anticipated to trigger a significant upswing across the market. Conversely, an unfavorable ruling could potentially lead to even greater market turbulence.