Market Analysis: Key Reasons for Bitcoin and Altcoins Drop

Bitcoin: Sudden Drop

An abrupt drop in the price of Bitcoin occurred on Tuesday, coinciding with a decline in exchange-traded funds (ETFs) in the U.S. The leading cryptocurrency lost more than 8% of its value, dropping below $62,000, marking the largest single-day percentage drop since November 2022. This decline has been attributed to several factors, including capital outflows from ETFs, according to analysis by Alex Kruger, a trader and economist. Preliminary data from investment firm Farside shows there was a net outflow of $326 million from ETFs on Tuesday, the largest on record.

During this period, one notable aspect of the Bitcoin ecosystem has emerged: the decline in the number of active wallets. Data from Santiment shows that over the past ten days there has been a net difference of -311,000 total non-zero coin wallets leaving the Bitcoin network. This reduction raises concerns about a possible decline in active participation within the Bitcoin ecosystem.

Reasons behind the Bitcoin correction:

1. Profit-taking: after a rapid rise during the first quarter, surpassing the previous all-time high of USD 69,000, reached in 2021, may have generated short-term exit signals for Bitcoin. This record high coincided with significant investment flows into cryptocurrencies, highlighted by the approval of asset-backed ETFs. Continued ETF selling could be holding back upside potential for the time being.

2. Instability in the stock markets: A correlation has been observed between the Bitcoin price and stock market indicators, especially with the Nasdaq, albeit with greater volatility. While the Nasdaq has gained 11% this year, Bitcoin has increased that percentage fourfold. However, the less positive outlook in the stock markets could affect projections for Bitcoin.

3.Technical considerations: Like any asset in the financial markets, cryptocurrencies are susceptible to projections by technical analysts, who use past behavior to forecast future movements. Although Bitcoin has experienced a downturn, analysts suggest that support levels still exist that could prevent a further decline. However, a breakout of the price channel could lead to a drop to $60,000 in the near term.

Altcoins Under Pressure

Ether (ETH), the second largest cryptocurrency in terms of market capitalization, peaked near $4,000 after Dencun’s update last week, but has since retreated to $3,130. One of the reasons behind this drop has been the decreasing likelihood of the U.S. SEC approving an ether ETF in May.

In addition, at the beginning of this month, the cryptocurrency market appeared to be overheated, with long-term traders paying more than 100% annualized funding to keep their bullish positions in perpetual futures open. Such a steep increase in leverage on the long side often suggests price corrections.

Investors are now closely watching the Federal Reserve’s interest rate decision, which will be announced on Wednesday, followed by Chairman Jerome Powell’s press conference.

“Next week we will have the Fed’s rate decision, followed by Powell’s press conference. This will give us a better view of whether the Fed still contemplates rate cuts in the near future. The strong economy and higher than expected inflation remain reasons for the Fed to maintain a hawkish stance without much pullback,” commented Greg Magadini, director of derivatives at Amberdata.

Other reasons that led to witness a decline in cryptocurrency prices according to economist Alex Krueger are that overleveraging exacerbated market volatility, triggering significant sell-offs.

On the other hand, the impact of Ethereum on the cryptocurrency market is notable: the failure to approve the ETF is interpreted as a negative signal, putting downward pressure on Ethereum and thus the crypto market in general. Negative flows into Bitcoin ETFs have contributed to market uncertainty and downward pressure on prices.

And finally, the speculative frenzy around Solana has generated a speculative bubble that eventually led to a correction.