Are the recent liquidations and falling prices setting the stage for a longer crypto winter, or could this be the breather before another bull run?
Crypto market stumbles as year-end draws near
As the year winds down, the crypto market seems to be taking a pause after a prolonged bullish run, with the global market cap shedding more than 6% to settle around $3.47 trillion as of Dec. 20.
Bitcoin (BTC) has slipped below the crucial $100,000 mark, trading at $96,680 as of this writing — a drop of nearly 3.5% in the past 24 hours.
Ethereum (ETH), the second-largest crypto by market cap, has experienced an even sharper decline, tumbling 6% over the same period and accumulating weekly losses of 15%, leaving it at $3,400 levels.
The decline hasn’t spared the rest of the market either. Top 100 altcoins recorded losses ranging between 10% and 20%, while meme coins — known for their wild price swings — were hit the hardest, with an average sector-wide decline of 12%.
Dogecoin (DOGE), for instance, plunged over 12% to $0.31, and Shiba Inu (SHIB) fell nearly 10% to $0.0000211. Other popular meme tokens like Floki (FLOKI), Bonk (BONK), and Pepe (PEPE) followed suit, with their weekly losses spiralling between 35% and 40%.
Adding to the chaos, the futures market revealed staggering liquidation figures. Over 374,000 traders were liquidated in the past 24 hours, totalling $1.37 billion, according to Coinglass.
Of these liquidations, $1.13 billion came from long positions, a clear sign of overly optimistic bets gone wrong. Bitcoin alone accounted for $320 million in liquidations, mostly from long positions, while Ethereum saw $308 million wiped out, with $263 million tied to longs.
A closer look at open interest — the total value of outstanding futures contracts — suggests that the market may be entering a bearish phase.
Bitcoin’s open interest had climbed steadily over the past few months, rising from $32 billion in early October to $68 billion by Dec. 18. However, this has now dropped to $62 billion as of Dec. 20, coinciding with the sharp price decline.
Typically, when both open interest and prices fall, it signals bearish momentum, as it reflects traders closing positions and reducing exposure during market uncertainty.
Fed’s interest rate moves spark volatility
The sharp correction in the crypto market can be attributed largely to the U.S. Federal Reserve’s latest interest rate decision and its accompanying commentary.
On Dec. 18, the Fed announced its third interest rate cut of the year, reducing the federal funds rate by 0.25% to 4.5%.
While this move was widely anticipated and brought the cumulative reduction for the year to 1%, the central bank’s messaging carried a more cautious tone.
Fed officials cleared that only two additional cuts are planned for 2025, and any further adjustments will depend on inflation trends and overall economic conditions.
The Fed’s measured approach reflects its ongoing struggle to control inflation, which is expected to stay above its 2% target until at least 2026.
The announcement sent shockwaves through financial markets, particularly risk-sensitive assets like crypto and stocks. U.S. equity markets reacted sharply, with the Dow Jones and Nasdaq 100 both tumbling over 2%.
At the same time, bond yields surged as investors sought the safety of treasuries. The 10-year yield climbed to 4.557%, while the 30-year yield hit 4.7%.
Meanwhile, the U.S. dollar index spiked to a two-year high, further tightening financial conditions and adding pressure to global markets, including crypto.
Bitcoin’s climb above $100,000 earlier this month was undeniably a milestone, and Ethereum’s rally past $3,500 similarly ignited widespread optimism.
However, such euphoric sentiment often prompts traders to lock in profits, especially when markets exhibit sharp corrections following extended rallies, as risk appetite wanes and traders adjust their positions.
This time was no different. As investors shifted toward safer options like treasuries and cash, crypto faced a dual blow of reduced demand and panic-induced selling.
The sell-off quickly escalated, triggering widespread liquidations as leveraged positions were forcefully unwound in futures markets. The cascading effect of these events drove prices sharply lower, plunging the crypto market firmly into correction territory.
Traditional market volatility drags crypto lower
The recent turmoil in traditional financial markets is spilling into the crypto space, with Bitcoin feeling the brunt of macroeconomic pressures that have left investors scrambling.
A closer look at the situation through the lens of Kobeissi Letter’s analysis sheds light on how rising volatility, changing market correlations, and the broader macroeconomic conditions are shaping the current narrative for Bitcoin and crypto assets.
The Volatility Index (VIX), often referred to as the “fear gauge” for traditional markets, has surged nearly 100% this week, suggesting heightened uncertainty.
This surge coincides with the Federal Reserve’s hawkish stance, which, while cutting rates on Dec. 18, suggested a slower pace of cuts ahead, rattling risk assets, including Bitcoin, as higher-for-longer rates have made safe-haven investments like U.S. Treasury bonds increasingly attractive.
The 10-year Treasury yield has now climbed to 4.5%, with fears of a rise toward the 5% level, a threshold that previously triggered corrections in both equities and crypto markets.
Diving deeper, Bitcoin’s performance can often be understood in relation to its correlation with traditional financial indices.
Earlier this year, Bitcoin shared a strong positive correlation with the Nasdaq and S&P 500 — peaking at 0.9 and 0.86, respectively, in June. This meant Bitcoin largely moved in tandem with tech stocks, benefiting from the same risk-on sentiment.
However, in mid-July, this correlation flipped to -0.87 and -0.86, signaling a rare divergence where Bitcoin briefly acted as a hedge during equity market weakness.
More recently, as of Dec. 19, these correlations have softened to 0.57 for the Nasdaq and 0.38 for the S&P 500. While Bitcoin still reacts to macroeconomic shifts, its price movements have started to reflect unique pressures, such as spot ETF inflows and outflows and other crypto-related developments in the U.S.
In the short term, Bitcoin faces a series of hurdles. Rising Treasury yields are diverting institutional capital toward safer assets, while equities are struggling to find support amid heightened volatility.
However, the softening correlation between Bitcoin and traditional indices suggests that the crypto market is not entirely beholden to broader market trends.
This decoupling, if it continues, could allow Bitcoin to carve out a more independent narrative, but only if it can withstand the current macroeconomic storm.
Expert takes: Is this a bull market breather?
Experts remain divided on Bitcoin’s short-term trajectory, but there’s a common thought: this correction, while unsettling, may not signal the end of the bull market.
Lark Davis draws on historical parallels to provide perspective. “In December 2020, Bitcoin dropped 12% after a massive rally, only to surge 136% within the next 23 days.” He points out that the current 13% dip follows a similarly strong Q4 performance.
While Davis warns that a further correction of 10-15% remains possible, he underscores that “there’s plenty of fuel left in the tank” for Bitcoin and the broader crypto market.
Adding to this perspective, Rekt Capital says that corrections during price discovery phases are both common and necessary. “Price discovery corrections tend to last a few weeks, and there are usually up to four in a bull market cycle.”
According to Rekt Capital, this is the first such correction in the current cycle, making it “an optimal re-accumulation opportunity with a high probability of price reversal to the upside.”
Michaël van de Poppe takes a slightly different angle, focusing on the potential for consolidation. He notes that Bitcoin’s dip below $102K triggered a sharp decline in altcoins, but such volatility is expected in a high-growth market.
“These are opportunities, and those drops will continue to happen,” he says. From here, he anticipates Bitcoin consolidating while altcoins potentially see another rally.
Beyond these short-term assessments, macro developments signal longer-term opportunities. Bitcoin Magazine reported that Groupe BPCE, a major French bank with 35 million users and $1.5 trillion in assets, has received approval to launch Bitcoin and crypto investment services.
The steady integration of Bitcoin into mainstream financial ecosystems, coupled with its increasing accessibility to retail investors, could act as a counterweight to current market fears.
However, risks remain. Elevated Treasury yields, macroeconomic uncertainty, and rising volatility in traditional markets continue to pose challenges.
Traders and investors should exercise caution, as further volatility can result in more dips. Trade wisely and never invest more than you can afford to lose.
Disclosure: This article does not represent investment advice. The content and materials featured on this page are for educational purposes only.
