[Cryptocurrency Analysis] Causes of Bitcoin's Sharp Drop

There is a saying that "cryptocurrency is like a canary in a coal mine." This is because it is the first to detect and react to changes in risk-asset preference sentiment. Just a month ago, Bitcoin (BTC) hit an all-time high, surpassing $126,000, but it recently plummeted below $90,000, giving back most of its gains for the year.

In this post, we analyze the three core causes that triggered the decline in the cryptocurrency market after key support levels were broken, and we examine the future direction of the market and the implications that investors should bear in mind.

[Cryptocurrency Analysis] Bitcoin's $90,000 Collapse: 3 Key Causes of the Market Drop and Outlook

1. Complex Background of the Drop: Macroeconomic Uncertainty

The recent sharp correction in the cryptocurrency market is assessed to be a result of **risk-off sentiment** reacting to the **instability of the macroeconomic environment** rather than any structural flaws within the cryptocurrency itself.

• Weakening Interest Rate Cut Expectations: Expectations for interest rate cuts by the US Federal Reserve (Fed) weakened, and successive hawkish (tightening) remarks led to an overall contraction in investment sentiment toward risk assets.
• Information Gap and Political Instability: The delayed announcement of key economic indicators due to the prolonged US government shutdown deepened investor anxiety, creating an information gap.

This macroeconomic uncertainty led to a strengthening of the dollar (DXY rise) and is analyzed as a major factor exerting downward pressure on risk assets like Bitcoin.

2. Large-Scale Exit of Institutions and Long-Term Holders (Whales)

Selling pressure from **institutional investors** and **Long-Term Holders (LTHs)**, who had previously pushed Bitcoin's price to an all-time high, accelerated the decline.

• ETF Funds Net Outflow Conversion: Bitcoin **Exchange-Traded Fund (ETF)** funds, which supported the rally earlier this year, recently turned into a net outflow of approximately $2.8 billion over the past month.
• Profit Realization by Long-Term Holders: Data shows that Long-Term Holders sold about 815,000 Bitcoins over the past month, playing a decisive role in adding price pressure in a situation where market demand was already weak.

3. Chain Liquidation of Leveraged Positions and Psychological Contraction

Excessive **leverage** in the futures market also amplified the shock of the sharp drop. Consecutive forced **liquidations** occurred following the price decline, forming a short-term downward momentum.

The **Fear & Greed Index**, which reflects investor sentiment, has currently reached the 'Extreme Fear' level, indicating a dominant atmosphere where investors are seeking to avoid risk.

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4. Conclusion: Response Strategy for the Risk Asset Readjustment Phase

The current cryptocurrency market is met with conflicting assessments: some view it as a temporary and normal correction phase, while others warn of a high probability of further decline.

However, there is also a perspective that this decline is a liquidity readjustment, not a loss of confidence in the asset. Therefore, investors should keep the following risk management principles in mind.

Key Response Strategies:

1. Acknowledge Risk Asset Volatility: Cryptocurrency is a high-**volatility** risk asset, so investors must be aware that the asset value could be halved during a downturn.
2. Maintain Long-Term View and Dollar Cost Averaging: When the market is in fear, a strategy of diversifying risk through **Dollar Cost Averaging (DCA)** can be effective.
3. Secure Portfolio Stability: To reduce the stress from cryptocurrency volatility, it is important to manage the Maximum Drawdown (MDD) by considering **Asset Allocation** alongside other asset classes.

The content of this blog is for reference in investment judgment only, and investment decisions must be made under individual judgment and responsibility. Under no circumstances can the information in this blog be used as evidence of legal liability for investment outcomes.