Today saw a bloodbath in the crypto markets, with most coins crashing at least 10%. As London woke up this morning, Bitcoin was trading around the $52,000 level. When 4pm hit, it briefly fell below $43,000. Of course, large intraday movements are becoming increasingly common in this market. Even with this being the case, the hit today was noticeable. Here’s our take on it.
Reasons for the crypto crash
One element being pointed to is the recent acceptance by El Salvador to have Bitcoin as a legal currency. As noted by a report by the BBC, “Congress approved President Nayib Bukele’s proposal to embrace the cryptocurrency, with 62 out of 84 possible votes on Tuesday night.”
The bill has been mooted for some time, and so the actual confirmation of this can be seen as a case of selling the news after buying the rumour. The strong price gains in Bitcoin and other coins in recent weeks can be associated in part to the growing acceptance of it in institutions. We noted the impact of the deals being made with regards to Ripple and the banking network in Asia.
For the case of El Salvador, the confirmation actually can be seen as a negative in the short-term for crypto assets. This is because investors had already priced this in, and looked to take profits after the news came out. Ultimately, this should just be a short-term correction, instead of anything more fundamental.
Another reason being flagged up is the fixing rate. The culmination of the crypto crash came around 4pm London/ 10am New York, otherwise known as the 4pm fix. This is the time when the referencing rate is taken for currencies. The rate at 4pm is recorded, and then positions are marked-to-market based on these rates. A lot of trading happens at this 4pm fix, causing heavy volatility.
Normally, with fiat currencies there is a strong depth of liquidity in the market, reducing sharp moves. However, with Bitcoin and similar coins this is not the case. This can cause heavy movements around referencing times, something that also impacted this move today.
Thoughts from here
Both the factors of the 4pm fix and the El Salvador profit taking are short-term factors. Neither of these reflect a substantial shift in the sentiment around crypto. The crypto crash of today was something that made investors take note. Yet, we struggle to see this as the start of something bigger.
From a technical perspective, most coins have bounced from the lows seen earlier today. For example, Bitcoin is comfortably above the 100 DMA (around $39,000) and has moved from the lows mentioned earlier up to $46,500 as we write. It has good support at $41,200, the highs that is struggled to break above in June and July that now act as resistance turned support. On the upside, $50,000 appears to be the first psychological resistance level to reach back up to.
Crypto is a fast moving 24/7 market that waits for no one. We should be able to see in a short period of time whether this move is going to hold and bounce or continue lower. Although we think this is a dip worth buying, it would be prudent to sit on the sidelines for the next 24 hours.