Understanding the initial cryptocurrency market crash of 2024 and what to anticipate moving forward
The initial cryptocurrency market crash of 2024 occurred on January 3 and resulted in approximately $600 million in liquidations across the entire market. The crash was primarily influenced by research conducted by Matrixport, a prominent digital asset company, which indicated a potential rejection of exchange-traded funds (ETFs). This sudden drop in the market wiped out nearly $1 billion in open interest in just a few hours.
The cryptocurrency ecosystem experienced a significant surge in selling pressure, leading to the liquidation of $520 million worth of long positions and approximately $30 million worth of short positions. One of the main contributing factors to the market drop on January 3 was Matrixport’s blog post titled “Why the SEC will reject all Bitcoin spot ETFs.” The post, authored by Markus Thielen, who serves as the Head of Research at Matrixport, highlighted a critical requirement missing from the filed ETFs that could delay the approval of Bitcoin spot ETFs until the second quarter of 2024.
The research also pointed out that the current leadership of the Securities and Exchange Commission (SEC), responsible for approving ETFs, is dominated by Democrats who are not embracing cryptocurrencies. This led to speculation that SEC Chair Gensler would unlikely vote to approve Bitcoin spot ETFs. The Matrixport research further mentioned that if the ETF approval news were to be rejected, it could potentially cause a crash that would wipe out the $5.1 billion in longs accumulated. This drop in price could theoretically lead to a 20% decrease in Bitcoin’s value, ranging from $36,000 to $38,000.
As a result, Bitcoin’s price plummeted from $45,308 to $41,454, representing an 8.51% decrease. This crash triggered liquidations of nearly $600 million in positions and resulted in a decrease in the total open interest from $18.66 billion to $17.72 billion.
Additionally, the estimated leverage ratio, which indicates the exchange’s open interest divided by their coin reserves, experienced a significant decline due to the crypto crash on January 3. The estimated leverage ratio dropped from its peak of 0.23 to 0.17, marking a 50% reduction in leverage.
This decline in the estimated leverage ratio typically indicates a decrease in risk and indicates the potential formation of a bottom in the market.
Regarding the future outlook, the 365-day Market Value to Realized Value (MVRV) ratio is currently at 33.15%. This ratio signifies that 33.15% of investors who purchased Bitcoin in the past year are currently in profits. If these investors decide to book their profits, it could potentially trigger another crash in the market.
Therefore, the 365-day MVRV ratio suggests that this crash might just be the beginning, especially if Matrixport’s forecast of the SEC rejecting Bitcoin spot ETFs holds true. If the ETFs indeed get rejected until the second quarter of 2024, Bitcoin could potentially follow a similar pattern to the 2019 mini-cycle and catalyze a steep correction. While Matrixport’s projected targets for an ETF rejection are $36,000 to $38,000, in a worst-case scenario, Bitcoin could reach the $30,000 psychological level and potentially bottom out around $24,800 by sweeping the equal lows.
It is important to stay informed and closely monitor market developments as they unfold to make well-informed investment decisions.