Will the Cryptocurrencies continue to decline after a widespread crash triggers market panic?

Market Review

Last week (8/14-8/20), cryptocurrencies collectively experienced a sharp decline, with some indicators approaching three-month lows or hitting new lows.

The total market capitalization continued to decline, dropping from $1.17 trillion to $1.05 trillion, representing a rare decrease of around 10%. This is the third time this year that it has approached $1 trillion but has not fallen below it.

Correspondingly, the market sentiment index decreased from 52 to 43, entering panic territory and reaching its lowest point since April. Currently, market sentiment has not been restored, and there is a possibility of further decline towards the previous low of 39.

Total Market Capitalization (Yellow) and Fear/Greed Index (Blue) Trend from January 1, 2023 to August 20, 2023; Source: MacroMicro.

All major coins declined without exception, with losses ranging from 5% to 20%. Stellar (XLM) showed the most resilience, declining by 5%, followed by Cardano (ADA) with a 7% drop.

Percentage Change of Major Coins from August 14, 2023 to August 20, 2023; Source: MacroMicro.

Uniswap (UNI) and Litecoin (LTC) performed the worst, falling by 22% and 20% respectively. Bitcoin (BTC) declined by 10%, but its market share only decreased by 0.7% and currently stands at 48%. Ethereum (ETH) price dropped by 9%, but its market share increased by 0.2% to 19.1%.

Reasons for the Cryptocurrency Market's Downturn

On August 17th, a rapid decline occurred in cryptocurrencies led by BTC, causing many long contract positions to be liquidated. Data shows that the amount of liquidated long contracts reached as high as $855 million, marking the largest volume in nearly three months.

Changes in Contract Liquidation Volume for Crypto from May 2023 to August 2023; Source: Coinglass.

Why did the downturn happen? The market frantically searched for reasons and eventually focused on an article from The Wall Street Journal, speculating that Tesla might sell BTC based on its past selling behavior with SpaceX. Without concrete information, numerous media outlets rushed to report, but the statements were vague, with some suggesting the sale of all BTC and others uncertain.

Until now, it is still unclear when and how much BTC SpaceX might sell—it remains purely speculative. This incident reminds us that as investors, we need independent investment logic and judgment to counter false and speculative news reports in the market. Simply put, buying on positive news and selling on negative news is not only exhausting but can also cause missed opportunities and losses.

Will Cryptocurrencies Continue to Decline?

Regarding the reasons for the cryptocurrency downturn, Grayscale's analysis states, "Despite Bitcoin staying within a narrow range of approximately $29,000 to $30,000 amid general weakness in global asset markets, investors have been selling stocks and bonds due to concerns about the Chinese economy and pressure on the bond market from the Fed's quantitative tightening policies. As cross-asset investors reduce portfolio risk, the simultaneous sell-off in stocks and fixed income has ultimately spilled over into the cryptocurrency market."

However, will cryptocurrencies continue to decline? Grayscale points out, "While we see several positive factors for the digital asset industry over the next few months, the macro market backdrop remains challenging and may continue to impact price volatility."

Looking at the industry, cryptocurrencies do not have significant upward momentum in the second half of 2023, with the major positive being the potential approval of a Bitcoin spot ETF, although uncertainty remains high. In addition, the ongoing conflicts between the U.S. SEC and multiple exchanges/projects have not been resolved and could even worsen. Therefore, without positive expectations on the macro or industry level, it is not ruled out that the cryptocurrency market will experience further decline.

Bitcoin: Weak Rebound with Bearish Market Dominance

On the morning of August 18th, it was mentioned in a previous article that if Bitcoin fell below $29,000, it would likely head towards $25,000, but the sudden crash happened even faster. Within a few hours of the article's publication, almost all cryptocurrencies plummeted, hitting the bottom in one fell swoop and even breaking key levels. Bitcoin reached a low of $25,186, closing at $26,600 that day with a long lower shadow.

Bitcoin Price Trend Chart from May 2022 to August 2023; Source: TradingView.

BTC experienced a rebound on the day of the crash but failed to sustain it. The following day, it formed a bearish candlestick pattern, indicating a counterattack by bears against bulls. Currently, Bitcoin remains relatively weak without a significant rebound, allowing bears to exert pressure, making a retest of $25,000 likely.

If Bitcoin can hold above $25,000 in August and September, there is a chance for an upward move towards $30,000 for the third time this year. However, if it unfortunately falls below that level, there will be no immediate support, and Bitcoin is highly likely to accelerate its decline towards $20,000.

Bitcoin Price Trend Chart from May 2022 to August 2023; Source: TradingView.