Since October 6, the crypto market has lost more than $1.1 trillion in value. Analysts at The Bull Theory examined the underlying causes of this behavior and identified key issues that caused such poor performance in what was expected to be a bullish fourth quarter for the sector.
Market liquidity is stumbling after the October 10 sell-off
One of the most important factors cited is the serious damage done to market liquidity following the dramatic sell-off on October 10, which led to more than $20 billion being liquidated by traders in a matter of minutes.
This particularly affected altcoins, with many seeing losses of 70% to 80%. With liquidity decreasing, the current market environment allows prices to fluctuate easily, meaning even small sell-offs can lead to rapid price drops.
The analysts noted that liquidity has not recovered since this initial dump, leaving order books for major cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH) increasingly scarce.
The consequences of this limited liquidity are stark; a small sales volume can cause significant downward price movements. This observation is consistent with the reality of recent market activity, where price declines seem more apparent than actual sales volume.
Another factor contributing to the downturn, as market analyst Tom Lee noted, is the behavior of major market makers. According to Lee, the ongoing correction may be due to one or two major entities incurring significant losses.
On top of these issues lies the excessive leverage in the market. Despite the unprecedented liquidations, many traders have reportedly returned to the market with greater leverage.
The Bull Theory analysts argue that this high debt burden, combined with thin markets, allows market makers to trigger substantial liquidations with minimal price movements, making the sell-off appear more aggressive.
Crypto Fear Index Hits Lowest Level in Over 3 Years
These problems are further compounded by market sentiment plagued by fear, uncertainty and doubt (FUD). The current stories circulating, such as speculation about Strategy (formerly MicroStrategy) facing forced liquidations if Bitcoin falls below $74,000, further exacerbates the panic.
It’s worth noting that Strategy’s cost base hovered around $30,000 to $32,000 during the 2020-2021 cycle. Even when Bitcoin fell to $16,000 – almost 50% below cost – the company sold no coins.
The Fear Index has also fallen to 10, a level not seen in over three and a half years. The analysts believe that this extreme fear suggests two possible scenarios: either the market has reached its bottom or it is approaching it.
Combined with these sentiment measures, the Relative Strength Index (RSI) for Bitcoin has returned to levels similar to January 2023, when Bitcoin was valued around $20,000.
The analysts suggest this indicates downward pressure on the market, especially within altcoins, where speculative activity has waned and retail interest is waning.
Despite the current turmoil, Bull Theory analysts believe that little has fundamentally changed within the crypto market. They emphasized that Bitcoin’s network remains robust, with an increasing hashrate, continued institutional interest, and a supportive U.S. government stance on regulated cryptocurrencies.
However, it remains to be seen what the ultimate direction of the digital asset market will be, as neither negative nor bullish cycles follow straight lines. This indicates that a new recovery and future dips may occur despite the downtrend, and vice versa.
At the time of writing, Bitcoin led Monday’s crypto market decline, hitting $91,940 – down 3% in 24 hours and down 13% in a week.
Featured image of DALL-E, chart from TradingView.com