Erik Weijers, a year ago

Putting the dip in perspective

On the morning of Saturday, December 4th, the price of Bitcoin and the crypto market as a whole suddenly dropped sharply. Bitcoin very briefly touched a price of about $42,000. Even though a partial recovery immediately followed, the upward trend of recent months has been broken. What is going on and what can we expect?

The markets had been nervous for a while. The good news in mid-October of the launch of the Bitcoin ETF in the US had receded to the background. This launch did not immediately lead to huge inflows of institutional money. In its place came less good macroeconomic news. Stock markets were already at a loss following news of the new omikron variant of the coronavirus. Bitcoin's price tiptoed down to a key support point of $53,000.

At that point, conditions were ripe for a forest fire in the crypto market. All so-called long positions of traders were especially vulnerable. These are positions held by traders who gambled with borrowed Bitcoin (or other cypto) on a price rise. If the price suddenly drops rapidly, a self-reinforcing effect of explosive price decline occurs. The reason is that more and more traders are forced to sell as lower and lower levels are touched. Especially on weekends, when there is less trading volume, there are not enough buy orders to absorb the falling price. This happened on Saturday morning.

For anyone who has been in the crypto market for more than a few months, this dip is nothing special. A dip of this magnitude happens on average a few times a year. The price drop in May 2021, for example, was even larger. This high volatility is seen by many people as a feature, not a bug of the crypto markets. There is no central authority to stop the market for a while or support it with extra money. It is a free market.

On the other hand, in these instances the discussion flares up about the bad side of leverage trading. There is a camp of analysts who criticize this form of trading with borrowed money. Although the permitted level of leverage has been limited on many exchanges in recent months, there is still enough left over to cause the price to fall rapidly (incidentally, the opposite can also happen: a so-called short squeeze, where the shorters go up in flames).

What to expect?

This dip is additional support for the hypothesis that we are not in a traditional four-year cycle. There are now several types of market players active with sometimes contradictory behavior and thus an opposite effect on the price. For the larger institutions, presently major players in the crypto market, December is a month to defend the P&L. It is not a time to invest in risky assets like Bitcoin. This was evident this weekend: there were not enough big players buying up the dip.

The picture is different when we look at the smaller investors. Perhaps the support will come from them in the coming weeks, until the institutions become more active again in January. One good sign is that these smaller Bitcoin holders are buying the dip, according to an analysis by on-chain analyst Willy Woo. Also, the number of addresses of these so-called "shrimps" (addresses with balances of less than one Bitcoin), is growing solidly. These are signs that we are not at the beginning of a real bear market. At the end of the 2017 mania, these shrimps left the market en masse.

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