Following the peak of $49,000, BTC faced its first significant drop on January 12, and subsequently, losses multiplied. Whales selling $5 billion in one go during those days, followed by increased GBTC sales, were already a sign of the current downturn. So, how and when will the general decline in cryptocurrencies end?
The Psychology of the Downturn in Cryptocurrencies
Isn’t it interesting? Investors who rushed to buy at the right levels just days ago, seeking advice for short-term inflated prices, now resemble people fleeing a fire at the cost of tumbling down the stairs. Panic and loss-driven sales in cryptocurrencies are a trend that never yields good results.
Investors realizing that continuous declines or rises do not occur in any market could help reduce their panic. For instance, what will those who sell at a loss today do if BTC surpasses $50,000 in a few weeks and triggers gains of up to 40% in altcoins? Naturally, they will panic buy at higher prices, hoping for profits. When we look at the bigger picture, we see an environment where those who cannot stick to at least medium-term goals consistently erode their capital by buying high and selling low.
At best, instead of losing money at entry points, they lose time by setting stop losses. However, gradual buying and selling at satisfying levels during rises can help ensure modest gains are kept.
Why Are Cryptocurrencies Falling?
From a macroeconomic perspective, the year 2024 started with a rebound for the DXY. After trading at 100.80 on December 28, 2023 – the lowest level in over five months – the US dollar gained momentum, and the index is currently around 103.75. This means the dollar is appreciating, and we are witnessing days when assets against it weaken. One of the reasons for the decline in cryptocurrencies is this. The second is voluminous spot BTC sales. The third major reason is the billions of dollars decrease in Grayscale BTC reserves due to GBTC sales.
Analysts and economists now price in a higher probability of success for the US Federal Reserve’s (Fed) strategy to reduce inflation without causing an economic downturn. However, the excessive optimism in interest rates has been clearly cut back. The expectation of an interest rate cut in March, which was as high as 81% more recently, has now fallen below 50%. This is the fourth significant reason for the downturn in crypto.
On January 21, US Senator Elizabeth Warren once again loudly highlighted that cryptocurrencies are actively used to circumvent US sanctions. The fifth and a medium to long-term negative reason is the risk of cryptocurrencies facing destructive restrictions through sanctions.
We can also see that the short-term risks (voluminous sales, GBTC exits) could quickly reverse in a few weeks (these short-term risks have a significant share in the abnormal decline) and move the markets in the opposite direction.
