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Market Dip Indicates Deleveraging Rather than Fundamental News: Crypto Analyst

Bitcoin’s recent rapid descent towards $40,000, coupled with a broader downturn in the cryptocurrency market, suggests a potential deleveraging phenomenon rather than being driven by a specific fundamental news catalyst.

On Monday, the largest cryptocurrency experienced a sharp drop of up to 7.5%, reaching $40,521, before recovering some of its losses to trade 3.7% lower at $42,165 at the time of this writing.

This downward trend was not limited to Bitcoin; it also affected other cryptocurrencies like Ethereum (ETH), XRP (XRP), Polkadot, and Cardano (ADA), all of which saw declines in value.

The broader market sentiment was reflected in a roughly 4% decline in the top 100 digital assets, as measured by an index. This marked the most significant downturn since November 22. The occurrence suggests a broader market shift and a potential deleveraging across various cryptocurrencies rather than being driven by specific news events.

Bitcoin (BTC) has undergone a notable surge this year, largely propelled by the anticipation of regulatory approval for the first U.S. exchange-traded funds directly investing in the cryptocurrency. This heightened expectation has broadened the potential investor base for cryptocurrencies.

Furthermore, the rally in Bitcoin and the wider virtual currency market has been augmented by speculations surrounding the possibility of the Federal Reserve cutting interest rates in 2024.

Richard Galvin, the co-founder at Digital Asset Capital Management in Sydney, drew attention to the significant increase in market leverage. He attributes the recent decline in Bitcoin’s value to a process of market deleveraging rather than being triggered by any specific fundamental news catalyst.

“The current fall looks like a market deleveraging as opposed to any fundamental news catalyst,” Galvin stated, emphasizing the role of market dynamics in the recent price movement.

Around $300 Million Worth of Positions Liquidated

According to Coinglass data, approximately $299 million worth of cryptocurrency trading positions, which were betting on higher prices, were liquidated on December 11. This marks the highest total since mid-September.

Investors are approaching the upcoming release of U.S. inflation data and the Federal Reserve’s final policy meeting of 2023 with caution, particularly regarding aggressive wagers on potential rate cuts. The global stock market and U.S. equity futures are displaying fluctuating trends, and the dollar gauge has edged up, reflecting an overall sense of caution among investors.

Tony Sycamore, a market analyst from IG Australia Pty, pointed out that it is common for traders to take profits during this period. He anticipates that the price declines towards the $37,500 to $40,000 range in Bitcoin will find support from dip buyers.

Despite Bitcoin’s impressive year-to-date surge of over 150%, contributing to the broader recovery in digital asset prices after a significant downturn in 2022, the cryptocurrency still remains well below its pandemic-era record of nearly $69,000 set just over two years ago.

Bitcoin’s Rally Shows Low Correlation With Traditional Assets

Bitcoin has demonstrated remarkable resilience by reaching a more than 19-month high, defying the downturn experienced by global markets. Over the past month, the cryptocurrency has achieved a gain of more than 14%.

This stands in stark contrast to the challenges faced by global shares and bonds, which have been grappling with losses since the beginning of the week. Despite the broader market fluctuations, Bitcoin’s notable surge highlights its distinct behavior and the increasing recognition of its role as a store of value and alternative investment.

The observed divergence underscores the current low correlation between cryptocurrencies and other traditional macro assets, as noted by Sean Farrell, the head of digital-asset strategy at Fundstrat Global Advisors LLC.

Over the course of 2023, Bitcoin has seen a reduction in correlations with stocks and gold. This decreased correlation is attributed to specific factors within the cryptocurrency market that have driven a remarkable 152% surge in the value of the largest digital asset.

A significant driver behind these gains is the anticipation that the United States will approve its first spot Bitcoin exchange-traded funds (ETFs). This approval could potentially broaden the demand for the token, further solidifying Bitcoin’s position as a unique and influential asset class with distinct market dynamics.

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I want to save money. Will cryptocurrency work?

Cryptocurrency is essentially virtual money that operates in a decentralized manner, not through a bank but directly on multiple independent computers.

Every cryptocurrency has two main components: the units of digital exchange called “coins” and the network within which the exchange takes place. These units can be transferred between wallets and exchanged on exchanges. The networks in which these coins exist are called blockchains, which translates to “chains of blocks.”

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