Bitcoin posted its worst slump since March in the last three sessions, creating concerns among traders that the overheated price rally is gradually losing steam.
The flagship cryptocurrency fell 5.18 percent over the weekend and expanded its correction by another 7.29 percent to $ 35,388 by 0916 GMT Monday. At its intraday low, it changed hands for $ 32,265. Overall, the downtrend was Bitcoin’s largest three-day decline since March.
Bitcoin’s first major correction after its 100% rally in three weeks. Source: BTCUSD on TradingView.com
Bitcoin's first major correction after its 100%-plus rally in three weeks. Source: BTCUSD on TradingView.com
Why Bitcoin fell
At the center of the cryptocurrency’s bearish correction has been profit-taking, led by concerns ranging from its overbought status to the recovery of the US dollar index to soaring yields on the 10-year US Treasury bill.
Traders appeared to have shifted some of their profits to the cash and bond markets, largely because the Federal Reserve had indicated, according to the minutes of its December meeting released Wednesday, that it would reduce the size of its bond purchase program by January 2022.
This coincided with the fact that Bitcoin hit its all-time high above $ 41,000 two days later, making it an ideal opportunity for traders to take profit and redistribute capital.
“Time to take some money off the table,” said Scott Minerd, chief investment officer at Guggenheim Investments, in a tweet on Monday. “Bitcoin’s parabolic surge is unsustainable in the short term.”
However, the recent Bitcoin price correction hasn’t stopped traders and investors from focusing on the cryptocurrency’s long-term prospects. This is due to a variety of basic catalysts that are said to provide bulls with a setback.
The Fed will not turn to the “tantrum” until the US economy has recovered to what appears to be satisfactory levels. Chairman Jerome Powell has already admitted that the inflation rate is set to rise above 2 percent. He also said his office will continue to buy bonds at the same pace until the US labor market bounces back significantly.
However, a broader recovery would only come after the US government promised to create additional fiscal stimulus. President-elect Joe Biden has confirmed that his first few days at the White House would mostly be focused on raising trillions of dollars in aid.
The prospect of a rising budget deficit would put the US dollar under pressure, at least in the medium term. Traders and investors have positioned Bitcoin to act as a safe haven against the possible decline in the greenback. This partly explains the recent correction, which coincided perfectly with the dollar’s rebound over the past three trading days.
The US dollar index is targeting key areas of resistance to confirm a bullish reversal. Source: DXY on TradingView.com
US dollar index targets key resistance areas to confirm a bullish reversal. Source: DXY on TradingView.com
The US dollar index, which measures the strength of the greenback against a pool of foreign currencies, is now breaking out of its falling channel to the upside. It is now targeting two critical areas of resistance as shown in the graph above and expects bearish fundamentals to move back down.
“Bitcoin is the beneficiary of liquidity-driven quarantine and stimulus trading with the highest beta,” said anchor Oliver Renick of TDA Network. “COVID curves reach peak values and [monopoly] Handover to Fiscal is [a] More [important] Catalyst.”
With that, the cryptocurrency is on the way back to $ 40,000.