Why Has Bitcoin Dropped Below $20,000?

Liquidity problems could account for the latest crypto crash. Over the weekend, bitcoin price dropped below a key psychological level for buyer support, and so far, has not managed to return above that level.

Bitcoin price fell below $20,000 on Saturday and is currently trading at $19,379 on Sunday morning, registering a 29.36% loss over the previous week. Bitcoin also retreated below $18,000 on Saturday afternoon, but the price so far has rallied 1.18% over the past 24 hours.

Ether is trading at $1,039 with almost 29% loss during the last week. On Saturday, the price of the second largest cryptocurrency retreated below $900 before bouncing back.

Crypto’s total market capitalization has also retreated by almost $300 billion since last Friday’s hot inflation data, from $1.19 trillion to $891.4 billion as of Sunday morning as the crypto sector suffers from a liquidity crisis that is pressuring a number of crypto hedge funds and lenders. Coinbase and other companies have announced layoff plans, while other firms were forced to liquidate positions or freeze customer accounts.

On Friday, Babel Finance temporarily suspended redemptions and withdrawals, citing “unusual liquidity pressures”. That followed crypto lender Celsius Network’s move to freeze all customer accounts earlier in the week.

BlockFi, Genesis Trading, and FTX also stated they’ve liquidated certain overleveraged counterparties on their platforms with some speculation and evidence pointing to Three Arrows Capital. Crypto is going through a classic deleveraging cycle and it has to continue that cycle until it hits bottom.

The world’s two most popular cryptocurrencies were down more than 35% in the past week, as both broke symbolic price barriers. Bitcoin bounced back to around $18,955 and ether was trading at about $995 just after 8 p.m. ET.

The carnage in the crypto market is partly caused by pressure from macroeconomic forces, including spiraling inflation and a succession of Fed’s rate hikes. Bitcoin peaked at $68,789.63 in November. Ether peaked at $4,891.70 that same month. Bitcoin last traded this low around December 2020.

The week started with crypto prices plummeting, and bitcoin was falling as much as 17% at one point in the day. It seemed like the crypto winter suddenly began.

In the chaos, Celsius, a major crypto staking and lending firm, shocked the market when it announced suspension of all withdrawals, swaps and transfers between accounts citing “extreme market conditions.” The platform also said the move was designed to “stabilize liquidity and operations.”

Investors were assessing the fallout of Celsius, and meanwhile, another crypto firm joined a growing list of companies cutting staff to try to prop up profits. To sum up; most crypto companies are looking for ways to cut costs, as investors rotate out of the riskiest assets, pulling down trading volumes.