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It was a sea of red in the cryptocurrency industry as the price of Bitcoin briefly dropped below $100,000 and the Cryptocurrency Fear and Greed Index moved from extreme greed territory of 88 to 69. So, why did cryptocurrencies collapse this week?
Bitcoin (Bitcoin), the largest cryptocurrency, was trading at $102,300 on December 19, while Ethereum (Ethereum) fell to $3,600. Some of the major laggards were coins like Cosmis, Floki, THORChain, Curve DAO Token, and Fantom.
Cryptocurrencies collapsed due to the Fed’s decision
The most important reason why a cryptocurrency collapse occurs is… Federal Reserve decision. The bank decided to reduce interest rates by 0.25%, as was widely expected. This reduction brought the cumulative reductions this year to 1%.
However, the Fed has indicated that it will only implement two additional cuts in 2025, citing its focus on controlling inflation. Officials expect inflation to remain constantly high, and will not reach the 2% target until 2026 or 2027.
The Fed’s hawkish tone has led to declines in cryptocurrencies and other risky assets. US stock markets fell, with the Dow Jones and Nasdaq 100 falling by more than 2%. US Treasury yields rose to multi-month highs, with the yield on 10-year notes rising to 4.557% and the yield on 30-year notes rising to 4.7%. Meanwhile, the US dollar index rose to its highest level in two years.
It means rebound and distribution
The price of cryptocurrencies also fell due to profit taking, panic, mean reversion, and Wyckoff distribution.
Historically, cryptocurrency investors take profits when Bitcoin and other tokens rise significantly. This profit taking can be explained in terms of mean reversion and the Wyckoff method.
Mean retracement is a situation where an asset declines in an uptrend such that it manages to move close to its historical averages. For example, as shown below, Solana remains about 20% above its 200-day moving average. Therefore, it may decline to approach this level.
The Wyckoff method identifies the main stages in an asset’s life cycle: accumulation, markup, distribution, and markdown. The recent rise in cryptocurrencies was part of the tokenization phase, while the continued decline could indicate either the distribution phase or the beginning of the devaluation process.
Will cryptocurrency prices bounce back?
Cryptocurrency prices often reflect Bitcoin’s movements. As mentioned earlier, Bitcoin’s cup and handle pattern indicates a potential… rising to $122,000 In the near term. If this happens, it could lead to a rebound in altcoins as investors benefit from the decline.
However, the immediate consequence of a decline may lead to a “dead cat bounce,” where an asset experiencing a significant decline temporarily recovers before resuming its downtrend.
