Bitcoin plummeted nearly $10,000 after hitting a new high. What happened in the market?

The market is so unpredictable. Bitcoin, having just reached a new high, barely had time to celebrate before plummeting nearly $10,000 in just four days, and is even trending lower. Ethereum, the recent brightest star, is no exception. Its upward momentum has been cut short, with prices falling from $4,788 to below $4,300. The volatility-sensitive altcoin market has been decimated once again, with most tokens dropping over 15%, further cooling the market's already buoyant performance. The reasons for a rise are often puzzling, but a decline is always accompanied by news. In fact, since the beginning of this year, the key to market trends has been US monetary policy. This year, the crypto market has been well-reflected in this expectation-based regulation. When expectations for rate cuts rise, the market rises; when expectations fall, the market falls. Against this backdrop, whether to cut, by how much, and how to cut have become the most pressing questions for market observers. Looking back at the issue of interest rate cuts, it has been a political drama in the United States. The United States, which has been undergoing a three-year tightening cycle, has achieved significant results. Regardless of external complaints, the fact is that inflation is gradually under control. While Biden's direct cash distribution to improve household balance sheets posed inflationary challenges, it did indeed facilitate a soft landing for the US economy by shifting debt from households to the government. However, the tightening cycle, originally expected to end this year, was disrupted by Trump's unforeseen tariff war. The Federal Reserve was caught in a dilemma: on the one hand, it was caught between shrinking GDP and high inflation; on the other hand, it needed to maintain redundancy to cope with the president's subsequent policies. Thus began the confrontation between Trump and the Fed. Furious, Trump posted several social media posts arguing that the Fed's interest rate cuts were too late. He threatened to force Powell to step down and even approached the shadow chairman to install his own people at the Fed, a move that would ensure a "successor." Meanwhile, Powell withstood the pressure, refusing to fire him, insisting that "he has no right to fire me," stating that CPI and inflation were the core factors. Since data is paramount, Trump became obsessed with it. In August, Trump fired Erica McEntuff, the director of the Bureau of Labor Statistics, alleging that official data had been deliberately manipulated to favor Biden. Earlier that month, the BLS released employment data showing that non-farm payrolls in the United States increased by only 73,000 jobs in July, far below the previously expected 102,000, significantly increasing the likelihood of a recession. On August 11, Trump nominated conservative Heritage Foundation economist Anthony McEntuff to be the director of the Bureau of Labor Statistics. Unsurprisingly, the new nominee is a Biden opponent. Replacing the head of statistics, nominating Federal Reserve Governor Miran, and repeatedly calling for Powell to resign demonstrate Trump's urgency for an interest rate cut. This urgency is understandable. For Trump, a rate cut is not just an economic issue; it's also a political one. The tightening cycle affects the performance of the stock market and the cryptocurrency market. Coupled with the impact of tariffs, Trump urgently needs to boost confidence to increase his approval ratings and resolve conflicts with the public. This shift in focus is the most logical approach for him. This round of muddying the waters has indeed served a purpose. The Federal Reserve, once as solid as a rock, has also shown a trend of increasing division. Since July, Federal Reserve Board members Christopher Waller and Michelle Bowman have voted against keeping interest rates unchanged, advocating an immediate 25 basis point rate cut. This is the first time in more than 30 years that two board members have voted against it. And just recently, San Francisco Fed President Mary Daly and Chicago Fed President Goolsbee both said that interest rates should not be cut hastily. The emergence of differences actually reflects that the possibility of a rate cut is gradually increasing. In August, with the release of the Labor Department's employment data that was lower than expected, investors also had greater expectations for a rate cut. The CME showed that the expectation of a September rate cut stabilized at 84.8% after rising to 92.1%. In other words, although there are still variables, the market has basically reached a consensus on a September rate cut. Back to the market, on August 14th, Bitcoin surged, reaching a new all-time high of $125,000, driven by factors like favorable pension policies and rising expectations of interest rate cuts. Ethereum, on the other hand, saw an even greater rise, reaching a high of $4,788, driven by institutional buying. Given the near certainty of a rate cut, why did it continue to decline? The reason, again, lies in expectations. While the probability of a September rate cut has increased, the frequency of rate cuts for the entire year has decreased due to the unexpectedly strong PPI index in July, from three to two this year. The magnitude of the rate cuts has also been reduced from the original 100 basis points to 50 basis points, with some even suggesting a pessimistic outlook of 25 basis points, which has had a significant impact on investors. It's worth noting that, despite being influenced by macroeconomic expectations, the US stock market has been more resilient, with its decline limited. The crypto market, however, is more sensitive to risk information and exhibits a more subdued nature. This Friday, the Jackson Hole symposium will convene in Wyoming as scheduled, where Federal Reserve Chairman Powell will deliver a key statement on the economic outlook. This symposium has attracted significant market attention due to Powell's numerous key revelations. Three years ago, Powell warned of the pain of combating inflation, sending short-term yields soaring. At last year's symposium, he hinted at a readiness to cut interest rates from a 20-year high, prompting a sharp drop in two-year yields. In September, the Federal Reserve began a cycle of interest rate cuts, with the first round being a 50 basis point reduction. While the market expects next month's rate cut to remain in place, the current heightened sentiment and political turmoil make it uncertain whether this will change. This has led to a risk-averse trend in investors. In addition to the rate cut, Treasury Secretary Scott Bessant also poured cold water on the outlook. Back in March, fulfilling a campaign promise, Trump issued an executive order designating Bitcoin as a strategic reserve asset. This primarily affected existing Bitcoin, but also proposed purchasing additional Bitcoin at a budget-neutral cost. Despite this budget-neutral decision, the market remains optimistic, believing that the sovereign wealth fund's entry into the Bitcoin market will provide another major support for prices. Unfortunately, Bessant recently stated in an interview with Fox Business News that the US government will not make new Bitcoin purchases, but will instead use $15 billion to $20 billion worth of confiscated Bitcoin from criminal and civil asset forfeiture proceedings or as compensation for fines to replenish the reserve. This news disappointed the crypto market, sending Bitcoin plummeting. Interestingly, within hours, Bessant himself offered a friendly message to crypto on the X platform, proposing that Bitcoin confiscated by the US government serve as the foundation of a strategic reserve and that the Treasury Department explore "budget-neutral" approaches to acquiring more Bitcoin. While his stance quickly softened, seeds of doubt remained in the market. It's worth noting that his ambivalent stance alone demonstrates the politicized power of the cryptocurrency world, powerful enough to force the Treasury Secretary to make a U-turn. Furthermore, this adjustment is also driven by a leverage cleanup. Before Bitcoin and Ethereum reached new highs, market FOMO (fear of a market crash) continued to intensify, and bullish sentiment prevailed. Even with increased funding rates, long leverage remained significantly higher than short leverage. This disparity in long-short leverage leads to greater chain reactions, and if prices trend unilaterally, the impact will spread widely. On August 14th, the market liquidated over $1.02 billion in derivatives positions, with long positions reaching $872 million and short positions only $145 million. This tussle between the two is ongoing. According to Coinglass data, if Bitcoin breaks through $117,000, the cumulative short position liquidation on major CEXs will reach $558 million. Conversely, if Bitcoin falls below $113,000, the cumulative long position liquidation on major CEXs will reach $690 million. Overall, the crypto market, which already had limited upward momentum, has entered a correction range after reaching new highs due to the combined effects of the above factors. Currently, Bitcoin has fallen from its peak of $124,400 to $114,700, a 7.79% drop. Ethereum has also fallen from $4,788 to $4,234, an 11.57% decline. Despite returning to the correction range, there's no need to panic given the market's trajectory. Bitcoin's trading volume and turnover haven't seen a significant increase during its four-day decline, suggesting a strong reluctance among sellers. As for price support, according to data from @Phyrex_Ni, Bitcoin's price support has already risen six times. Currently, over 750,000 Bitcoin (BTC) are held at $117,000. This high level of holdings provides a solid foundation for Bitcoin's price. Of course, high holdings also carry high risk, but given the nature of existing holders, they will not readily sell their holdings unless there's a clear downward trend, even if the price breaks down in the short term. Externally, the expected interest rate cuts, regulatory relaxation, and increased holdings by major investors all indicate a positive market outlook. In fact, given the unchanged external environment, the current sharp drop in BTC stems largely from the divergence between bulls and bears following the rally to new highs. This convergence of bullish and bearish sentiment is particularly pronounced at the slightest sign of trouble. Looking solely at the options market, the current BTC 25 Delta Skew is similar to the level seen in late March and early April, indicating a certain degree of bearish sentiment. Compared to Bitcoin, Ethereum may face a greater problem. While ETF data has been impressive, with Ethereum spot ETFs seeing a record-breaking weekly net inflow of $2.85 billion last week, ETH still faces significant selling pressure from the staking queue. As of press time, the Ethereum blockchain's validator exit queue reached 860,286 ETH, also a record high, but the waiting list for staking is only 290,541. This suggests that the number of investors waiting to profit is increasing, and ETH may soon face significant market selling pressure, which will intensify as its price declines.

Rationally speaking, given the crucial juncture of the Central Bank's annual meeting this week, the market's direction will likely align with this timing. Currently, there's no clear bearish news. While there's an objective technical correction trend, and most technical analysts believe support lies at $112,000, before Friday, under a relatively optimistic scenario, the market is unlikely to experience an uncontrollable decline and will likely remain volatile. ETH's price carrying capacity is slightly weaker, and judging by the CME gap, the recent ETH CME gap is between $4,100 and $4,200, with a certain probability of filling this week or even further declines.

Therefore, for the average investor, the key is to hedge well.