Bitcoin BTCUSD -0.17% and other cryptocurrencies fell Thursday, falling along with the stock market as investors worry about the prospect of a recession . The big rally in digital assets last week, which had little fundamental support, will now be tested.
The price of bitcoin has fallen 2% in the last 24 hours to below $20,800. The major cryptocurrency closed at $21,500 at the peak of recent trading, the zenith of a stunning rally that lifted bitcoin more than 20% in a matter of days to levels not seen since the influential FTX trading platform collapsed in November.
“Bitcoin prices are weakening as growth fears have led Wall Street to fear that a soft landing may not happen. The outlook for crypto has improved dramatically over the past few weeks, but the current rebound seems to have finally encountered some resistance,” said Edward Moya, an analyst at brokerage Oanda.
Bitcoin hit a two-year low after the FTX bankruptcy, falling to nearly $15,500, and oscillated between $16,500 and $17,000 for several weeks before starting its rise last week in the longest winning streak in nearly a decade .
But the momentum began to change Thursday after the Dow Jones Industrial Average and the S&P 500 fell Wednesday — the worst day for the stock market in 2023 — and were poised for more losses in the day ahead. Investors are worried that the Federal Reserve won’t be able to stage a “soft landing” – getting inflation under control and avoiding a recession – as fears shift from stocks to cryptocurrency, given the correlation between the two risk-sensitive assets .
“Bitcoin is still holding above $20,000. Indices could still go down to find a local bottom in the next few days, bitcoin will probably be supported at the psychological level of $20,000,” said Yuya Hasegawa, an analyst at the Bitbank crypto exchange. “In other words, Bitcoin’s decline is likely to be shallow.”
One of the factors pushing prices up was the dynamics of the short squeeze : so many traders were betting against or shorting bitcoins that the start of a significant upward move was accelerated as investors were forced to buy back their positions to avoid further losses.
More importantly, the rally was exacerbated by a lack of liquidity in the cryptocurrency markets. Liquidity was reduced after the collapse of FTX, which pulled down market maker Alameda Research and locked up some assets of other liquidity providers on the bankrupt platform.
What this actually means is that there are fewer buyers and sellers in the market, so when prices go up, fewer sellers meet demand, helping prices continue their uptrend. While the lack of liquidity has been welcomed amid the Bitcoin rally, falling prices can cause a trend reversal, and it can get ugly.
Nevertheless, many in the digital asset space still believe that the worst of the bear market, which has seen bitcoin fall from its November 2021 high around $69,000, is over. A rebound from two-year lows could signal the formation of a market bottom and capitulation – when all the traders who were going to sell have already sold.