Will the crypto crash stop?

Since yesterday, a new crash in the crypto market is underway. 

In reality, for now, it is nothing comparable to that of late January/early February, but it should still be considered a minor crash.

However, it is necessary to distinguish between two crashes: on one hand, the crash of Bitcoin’s price, and on the other, that of the altcoins. 

Obviously, the two crashes are closely linked, but while there is a specific explanation for Bitcoin’s crash, the altcoin crash appears to be more dependent on Bitcoin’s situation than on external factors. 

Underlying Issues

The underlying issues are twofold. 

Before analyzing them, it is important to emphasize that these are external issues, meaning they are not directly related to the crypto market, and moreover, they could be temporary. 

The primary issue, which has been present in the financial markets for several weeks now, is fear. 

Taking as a reference the trend of the VIX index (CBOE Volatility Index), which measures the implied volatility of options on the S&P 500 index, the main American stock index. 

The VIX is also known as the “fear index” because it effectively measures how turbulent the market expects the American stock exchanges to be over the next 30 days.

At the beginning of the year, the VIX was below 17 points, but by mid-January, it had already risen above 18. From January 20 onwards, it climbed above 20 points, reaching an initial peak of nearly 22 points at the beginning of February. 

During those days, the price of Bitcoin dropped to around $60,000. 

Although later the VIX returned to 18 points, and the price of Bitcoin then climbed back well above $65,000, starting from the end of February the VIX surged again, reaching a peak of almost 30 points on March 9. 

In reality, the price of Bitcoin has not returned to $60,000, and in fact, the lowest point reached on March 9 was above $66,000. 

The fact is that in the following days, the VIX fell back below 23 points, and by that time, the worst-case scenario had already been priced into Bitcoin’s price. 

The Monday Issue

To be honest, starting from Monday, the VIX has shown signs of awakening. 

The cause, obviously, is the sharp increase in the price of oil and natural gas due to the war in Iran. 

This time, however, the rise seems to have stalled at the 25-point mark, at least for now, although it is absolutely not possible to rule out that it may continue. 

However, all this is not enough to justify yesterday’s minor crash in the crypto market. 

In fact, a second problem has been added to all this. 

Between Saturday and Monday, the US government drained more than 130 billion dollars from the markets. This can be easily calculated from the official daily data published by the US Treasury regarding the amount of dollars deposited in the US government’s bank accounts. 

Given that from approximately 806 billion dollars on Friday, it rose to over 937 billion by Monday, in just three days these deposits increased by as much as 16%. 

Additionally, $130 billion drained from the markets in just three days, two of which were stock market closure days for the weekend, is indeed a significant amount. 

To be honest, the US government did not drain them directly from the financial markets, but liquidity circulates freely among all markets, so part of that drainage inevitably ended up affecting the financial markets as well. 

Generally, these movements, when involving significant amounts, impact financial markets with a couple of days’ delay, and so yesterday (Wednesday) Monday’s outflow had its negative effects on the US stock exchanges. 

Temporary Issues 

However, both of these issues should be temporary. 

In fact, the VIX rarely remains very high for long, and although the current level of around 25 points is not considered particularly high, but “only” medium-high, it seems possible for it to return to more moderate levels in the coming days. 

Moreover, it seems highly unlikely that the US government can keep so many dollars idle in its bank accounts for long, so much so that it already released nearly 8 billion on Tuesday (yesterday’s data is not yet available). 

In addition to all this, it should be noted that yesterday there was a press conference by Fed Chairman Jerome Powell, which, however, did not significantly move the markets. The crash, in fact, had started many hours earlier and continued for several hours afterward. 

In theory, it cannot be entirely ruled out that the decision to drain $130 billion between Saturday and Monday was made precisely to weaken the markets two days later, specifically on Wednesday (yesterday) when Powell was scheduled to hold his press conference.
It should not be forgotten that there is an ongoing war by Trump against Powell, although in the end, Powell’s speech yesterday did not cause significant damage. 

Tomorrow, in light of the new data on dollars deposited in US government accounts, it will be possible to get an idea of how financial markets might react throughout the day. 

The Crash

The minor Bitcoin crash began a couple of hours before the reopening of the US stock markets, although the data on the dollars drained by the US government had already been published. 

Initially, the psychological support at $73,000 was breached, while subsequently, the decline continued down to $71,000. 

When Powell’s press conference began, the price had temporarily returned to almost $72,000, while by the end it had fallen back to $71,000.

In the following hours, it first dropped to $70,500, then climbed back to $71,500, but many hours after the US markets closed, and a few hours after the Asian markets reopened, it fell below $70,000. 

After hitting a local low of around $69,500, it slightly rebounded to $70,000. 

However, it should not be forgotten that last Wednesday it had dropped to $69,200. 

A similar discussion can be made for Total3, which is the market capitalization of all altcoins, excluding Ethereum and stablecoins, and of course, Bitcoin. 

Total3 reached a weekly peak on Tuesday at 761 billion dollars, while yesterday it had dropped to 723. Today it hit a local minimum at 721 billion, but it is not certain that the decline has ended. 

Therefore, Total3 lost just over 5%, while BTC lost more than 8%. This confirms that the two aforementioned issues primarily impacted Bitcoin, and it was then Bitcoin’s minor crash that caused the decline in altcoins. 

Ethereum instead lost nearly 10%, but on Monday it had risen by 9% in a single day, so in addition to the mini-crash triggered by Bitcoin’s decline, it also had to endure a sort of burst of a mini-mini-bubble so small that perhaps it cannot even be defined as a bubble. 

In light of what has been highlighted earlier, there is still the possibility that this mini-crash could end as early as today, or in the coming days, and perhaps even return to pre-crash price levels.