The overall crypto market plummeted. What is the economic signal behind this?

Original｜Odaily Planet Daily

Author: jk

In the past 24 hours, the global cryptocurrency market has experienced a dramatic price fluctuation. From the evening of April 12 to the early morning of April 13, the market value of major digital currencies such as Bitcoin, Ethereum and many other small tokens generally fell. This sudden market turmoil has attracted widespread attention from market participants. Analysts are trying to interpret the reasons behind this phenomenon, including possible external economic factors, policy changes or a sharp shift in market sentiment.

Market Summary

From a macro perspective, the total market value of cryptocurrencies fell to $2537.9 billion, a 24-hour drop of 7.3%. As of the time of writing, Bitcoin is currently trading at $66,814, a 24-hour drop of 4.91%, and once fell below $66,000; Ethereum is currently trading at $3,217, a 24-hour drop of 8.16%, and once fell below $3,100, with a maximum drop of 9.34%; SOL fell below $150 and then rebounded to $151, a 24-hour drop of 12.57%. Other mainstream currencies such as MATIC, XRP, DOGE, BCH, etc. have all fallen by more than 10%.

Bitcoin price trend in the early morning of April 13. Source: Coinmarketcap

According to Coinglass data, the total liquidation volume in 24 hours was US$878 million, of which long liquidation reached US$784 million.

The reason behind it

As far as the market is concerned, many people are already worried whether this is a precursor to the interruption of the bull market. At present, there are several different views on this plunge in the market:

One theory is that this plunge is due to a correction before Bitcoin halving. Several key reasons why the market may experience a correction and plunge before Bitcoin halving include:

First, since the block reward for Bitcoin mining will be halved, miners will receive fewer Bitcoins for the same mining work. This reduction in potential income may force them to sell Bitcoin at its current relative high level to cover higher operating costs in the next quarter, increasing supply pressure on the market and thus pulling down prices.

Secondly, high market expectations and speculation about the halving event could push prices up before the event, and prices could reverse sharply if these expectations are not met. ** In addition, if the market buys in too much too early before the event, any small trigger close to the event could lead to large-scale profit-taking,** resulting in a sharp drop in prices.

Finally, based on historical patterns and psychological expectations, investors often use historical patterns to guide current market actions. Given that past halving events have sometimes led to significant price increases, market expectations are high. However, if these expectations begin to appear too optimistic, investors may begin to sell their holdings before the halving to take advantage of the current high prices, which may cause the market to fall.

Therefore, while the halving itself is a positive sign for Bitcoin, the uncertainty and speculation leading up to the halving could lead to significant market volatility and price corrections.

From a macro perspective, the Fed's balance sheet continues to shrink, reducing the supply of dollars in the market. The reduction in dollar liquidity, especially in the global financial system, usually leads to a fall in the prices of risky assets, including stocks and cryptocurrencies. Since the cryptocurrency market is very sensitive to changes in liquidity, capital outflows may lead to a sharp drop in prices. In addition, when the market expects that the dollar will become more scarce, investors may turn to more stable or traditional assets and reduce their investment in cryptocurrencies.

According to Arthur Hayes,

The Bitcoin block reward is expected to halve on April 20. This is often seen as a bullish catalyst for the crypto market. I agree that this will push prices higher in the medium term; however, price action directly before and after the halving can be negative. The narrative that the halving is positive for crypto prices is already entrenched. When the majority of market participants reach a consensus on a certain outcome, the opposite usually happens. This is why I believe Bitcoin and crypto prices in general will see a drop around the halving.

Considering the halving occurs during a period when USD liquidity is typically tight, this will add fuel to the crypto asset sell-off. The timing of the halving further reinforces my decision to pause trading until May. …So, I’m selling.

Bitcoin price trend before and after halving, source: Grayscale

Despite the current uncertainty in the market, many investors and analysts remain optimistic about the long-term prospects of cryptocurrencies. They believe that this price adjustment may provide a good opportunity for long-term investors to enter the market. Every adjustment in the market is a test of investor sentiment and market trends, and it is also a period of layout for potential future growth.