Bitcoin plunged below the key $40,000 support level over the weekend, falling to lows not seen since early December. The flagship cryptocurrency is now down nearly 20% from its post-ETF launch highs last week. This pullback has erased weeks of gains fueled by optimism around the SEC approving the first Bitcoin spot ETFs.
Lead Up to the Crash
Bitcoin went on a blistering rally starting in late December in anticipation of the ProShares Bitcoin ETF (BITO) launch. Prices shot up from around $45k to over $52k on January 11 when the ETF began trading. This first US spot Bitcoin ETF saw massive trading volumes out of the gate, with over $1 billion exchanging hands on its first day.
The successful launch of BITO sparked further optimism that regulators were warming up to crypto assets. This narrative propelled Bitcoin to new local highs around $49k the following week. Additional spot ETFs like Valkyrie’s BTF quickly followed. With billions flowing into these new investment vehicles, traders braced for even higher prices.
But over the past week, the foundation of this house of cards has slowly crumbled away.
Bitcoin Price Action
|Jan 11 (BITO Launch)
|Jan 21 (Local Highs)
|Jan 22 (Break Under $40k)
Table showing Bitcoin’s price action around the spot ETF launches
Profit Taking and Leverage Unwinding
Last Wednesday, with Bitcoin failing to see continuation from its bounce off $40k support, early ETF investors started taking profits. This selloff triggered around $157 million in liquidations across crypto futures exchanges as overleveraged long positions were stopped out.
Into the weekend, with prices descending firmly below $40k, even more speculative leverage has been flushed from the system. According to one report, $148 million in crypto shorts and longs have faced liquidations over the past 24 hours.
At the same time, Bitcoin has fallen in lockstep with the tech-heavy Nasdaq index as expectations of tighter Fed policy siphon liquidity from risk assets across the board. This correlation shows crypto’s increasing integration with traditional equities.
Bearish Technicals and On-Chain Metrics
Bitcoin is now testing its 21-week exponential moving average, which has consistently held as support during this bull market. This key macro level around $38k is the battleground bulls must hold to prevent further breakdown.
Bitcoin Support Levels
According to analysts at InvestingHaven, losing the 21-week EMA decisively on a weekly basis would confirm Bitcoin’s first “momentum breakdown” since the March 2020 crash. This would be an ominous technical signal opening the doors for a retest of the current bull market’s $30k lows.
On-chain data also shows warning signs of waning momentum. The Puell Multiple, which tracks Bitcoin’s issuance value relative to its market cap, has plunged nearly 40% over the past two weeks – indicating investor appetite is falling despite rampant inflation.
Macro Headwinds Persist
With looming Fed rate hikes and continued broad market uncertainty, risky assets could face further selling ahead. However, there are also arguments for Bitcoin finding its bottom soon rather than breaking down further.
According to billionaire investor Mike Novogratz, $40k marks the macro low for this market. As long as prices hold here, the bull case remains intact.
Other analysts point to historical data showing Bitcoin bottoms are usually formed in January during bull markets. With mass liquidations likely finished, buyers could return soon to restore the uptrend.
Though in the short run, volatility is likely to remain elevated as Bitcoin fights to hold key support levels between $40k down to $30k. Most experts agree, breaking below the 2021 lows would derail the bullish cycle thesis and open the door for an extended bear market.
The Path Ahead
In the past, Bitcoin has taken between three to six months to recover from major drawdowns. If historical patterns repeat, buyers may need patience for a return to all-time highs this year.
Much depends on broader risk asset sentiment stabilizing to provide a tailwind for crypto. Though with so much speculative leverage now flushed out, markets could be setting up for the next leg higher in a similar “disbelief rally” to what fueled the surge off March 2020 lows.
Volatility and sharp drawdowns should be expected during a long-term bull market. The question now is whether $40k will hold as the cycle bottom, or if a deeper correction is still in the cards. Either way, Bitcoin’s halving-driven four-year cycles suggest this bull run likely has further to go over the coming year.
So in summary, while Bitcoin suffered a steep pullback as post-ETF euphoria faded, key support still holds for now. As long as dips remain above $30k, cautious optimism for new highs by late 2024 remains warranted. But likely preceded by continued turbulence in the coming months.
To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.