Key Points
The crypto industry witnessed a significant downturn as the price of Bitcoin momentarily fell below $100,000. The crypto fear and greed index also shifted from its previous extreme greed zone of 88 down to 69.
Understanding the Crypto Crash
On December 19, Bitcoin (BTC), the largest cryptocurrency, traded at $102,300. At the same time, Ethereum (ETH) dropped to $3,600. Other cryptocurrencies that lagged behind included Cosmis, Floki, THORChain, Curve DAO Token, and Fantom.
One of the primary reasons for the crypto crash was the Federal Reserve’s decision. The bank chose to reduce interest rates by 0.25%, a move that was widely anticipated. This reduction brought the total cuts for the year to 1%.
The Federal Reserve, however, indicated that it would only implement two more cuts in 2025, due to its focus on controlling inflation. Officials predict that inflation will persistently remain high, only reaching the 2% target in 2026 or 2027.
This hawkish stance from the Federal Reserve led to declines in cryptocurrencies and other risky assets. U.S. equity markets also took a hit, with the Dow Jones and Nasdaq 100 indices falling over 2%. U.S. Treasury yields rose to multi-month highs, with the 10-year yield increasing to 4.557% and the 30-year yield reaching 4.7%. In the meantime, the U.S. dollar index soared to a two-year high.
Mean Reversion and Distribution
The crypto market was also negatively impacted by profit-taking, panic, mean reversion, and the Wyckoff Method distribution.
Crypto investors typically take profits when Bitcoin and other tokens rally excessively. This profit-taking can be explained using mean reversion and the Wyckoff Method.
Mean reversion is a situation where a rising asset falls to move closer to its historical averages. For example, Solana remains about 20% above the 200-day moving average, indicating that it may drop to get closer to that level.
The Wyckoff Method identifies key phases in an asset’s lifecycle: accumulation, markup, distribution, and markdown. The recent crypto surge was part of the markup phase, while the ongoing decline could signify either a distribution phase or the start of markdown.
Future of Crypto Prices
Cryptocurrency prices often mirror Bitcoin’s movements. As previously noted, Bitcoin’s cup-and-handle pattern indicates the potential for a rally to $122,000 in the near term. If this occurs, it could trigger a recovery across altcoins as investors capitalize on the dip.
However, the immediate aftermath of a dip may lead to a “dead cat bounce,” where an asset experiencing a significant decline temporarily recovers before resuming its downtrend.
