The price of Bitcoin plunged from $10,160 to $9,012 on BitMEX within less than 28 hours, dropping by 11.3%. It coincided with a staggering 5.6% drop of the Dow Jones Industrial Average (DJIA).
Three key factors contributed to the sudden downtrend of Bitcoin: liquidation of $78 million worth of longs, correlation with the stock market since March 2020, and the strength of the $10,500 multi-year resistance zone.
On March 13, the price of Bitcoin plummeted to as low as $3,600 on BitMEX.
The move liquidated over a billion dollars in futures positions. The downtrend was so strong that BTC technically could have hit zero.
Sam Bankman-Fried, the CEO of major cryptocurrency derivatives exchange FTX, said after BTC dropped below $4,000:
“R was huge today. There were endless liquidations, and the BitMEX orderbook was basically nonexistent… It means BTC might go to 0. But it didn’t.”
Since then, data from Skew shows Bitcoin has been correlated to some extent with the U.S. stock market.
On June 11, right before the price of Bitcoin dropped to as low as $9,012, pre-market data of the Dow Jones indicated a 900-point drop.
Before the U.S. stock market opened, the Dow dropped by around 3% during an after hours trading session.
As equities dropped, the price of Bitcoin followed. The stock market correction did not necessarily cause BTC to decline. Rather, uncertainty across all asset classes likely fueled a short-term drop for BTC.
Other assets and stores of value also dropped off simultaneously. Gold fell by 1% in two hours, despite its newfound momentum since early June.
The initial slump in the price of Bitcoin led an immense amount of long contracts in the futures market to get liquidated.
In the Bitcoin futures market, traders use leverage in between 1x to 125x to trade BTC with added risk. Higher leverage leaves BTC vulnerable to a steep pullback in a short period of time.
On BitMEX alone, in a single hour, about $50 million worth of futures contracts were liquidated.
The futures market likely affected the price of Bitcoin more heavily in the recent fall because the volume of the spot market has been on a decline since early May.
The drop also happened at a pivotal point for the price of Bitcoin in a technical sense.
Historically, the $10,000 to $10,500 range has served as an important multi-year resistance range.
In October 2019 and February 2020, the price of BTC fell by 39% and 65% following the rejection of $10,500.
A confluence of Bitcoin approaching a critical area of liquidity, an abrupt plunge of the U.S. stock market, and the liquidation of tens of millions of dollars worth of longs caused a rapid sell-off.
In the short to medium-term, the biggest source of selling pressure for Bitcoin is miners.
For now, data from ByteTree suggests miners are not selling more than they mine on a daily basis which is around 900 BTC per day.
Whether miners begin to sell more BTC than their daily revenues to cover operational costs and the sell-off in the futures market continue will decide the short-term price trend of Bitcoin.