What caused the crypto market crash? What do industry insiders say?

Compiled by: Deng Tong, Golden Finance

Several specific factors have contributed to the latest drop in cryptocurrency prices, including:

• The cryptocurrency market is still recovering from the $1.4 billion Bybit exchange hack.

• Investors are in risk-off mode amid continued outflows from cryptocurrency investment products.

• Strong upside resistance has dampened recovery efforts in the global cryptocurrency market capitalization.

• U.S. stocks struggle to escape recent downturn.

Ethereum leads market selloff

Today’s cryptocurrency market decline is part of a correction that began on Feb. 21, when the Bybit cryptocurrency exchange was hacked, losing more than $1.4 billion worth of ETH and ETH-related tokens in the largest cryptocurrency theft ever.

The sell-off continued on Feb. 25, including:

• Ethereum led the market decline, down 11.5% over the past 24 hours to trade at $2,503.26.

• Bitcoin and Solana also fell, with Bitcoin down 4.9% to $91,549.81 and Solana down 15.7% to $141.76.

• Other cryptocurrencies such as XRP fell 10.8%; Dogecoin fell 13.7%; and BNB fell 6.5%.
  

Massive liquidations in the derivatives market compounded the problem.

The sell-off triggered the liquidation of leveraged positions. As of press time, a total of 316,393 traders were liquidated in the past 24 hours, with a total liquidation of US$952.08 million.

The dominance of long liquidations shows that the cryptocurrency market is over-leveraged on the bullish side.

Despite the current bearish market sentiment, cryptocurrency options trading platform QCP Capital said that cryptocurrency prices and implied volatility showed a mild reaction compared to the 2022 FTX crash.

QCP Capital said in a Telegram message that this “highlights the growing maturity of the cryptocurrency landscape,” adding:

“Bybit was able to quickly obtain a bridge loan to fill a liquidity gap at a critical time, which highlights the resilience and ample liquidity in the lending sector.The industry has recovered steadily since 2022 and experienced a sharp surge ahead of last year’s U.S. presidential election.”

Investors continue to avoid cryptocurrency risks

The continued correction in the cryptocurrency market is consistent with capital outflows from cryptocurrency investment products.

Key Takeaways:

• Digital asset investment products saw outflows for the second week in a row;

• Outflows totaled $508 million in the week ended February 21, according to a report by CoinShares.

• This suggests that institutional investors have reduced their exposure to digital assets.

• Bitcoin saw the largest outflows, totaling $571 million.

• Year-to-date inflows fell from $7.4 billion two weeks ago to $6.6 billion last week.

Capital flows of crypto investment products. Source: CoinShares

CoinShares head of research James Butterfill attributed this to uncertainty about trade tariffs, monetary policy and inflation. He said:

"We believe investors are being cautious following the U.S. presidential inauguration and the attendant uncertainty over trade tariffs, inflation and monetary policy."

Meanwhile,market participants are awaiting the last U.S. inflation data of the week.

What to know:

• The personal consumption expenditures (PCE) index, the Fed's "preferred" inflation measure, will be released on February 28.

• Last week, initial jobless claims exceeded the median forecast by 4,000 to reach 219,000, suggesting that labor market conditions are weakening.

• The number of people filing for unemployment benefits rose by 4,000 to 219,000 last week, suggesting that labor market conditions are weakening.

• This significantly reduces expectations for multiple rate cuts in 2025.

• For example, despite two Fed meetings scheduled during this period, rate cuts are unlikely, according to the CME Group’s FedWatch tool.

Federal Reserve target rate probability for July 30 FOMC meeting. Source: CME Group

• The odds that the Fed will keep interest rates unchanged at the next two meetings are currently 97.5% in March and 73% in May.

Crypto Markets Face Huge Overhead Resistance

Today’s drop in the market capitalization of all cryptocurrencies (TOTAL) is part of a correction that began on January 31st, with a key support area turning into resistance.

Key Points:

• TOTAL is trading below a critical supply zone between $3.28 trillion and $3.31 trillion, which is the 50-day and 100-day simple moving averages (SMAs).

• The relative strength index (RSI) is currently at 40, suggesting that market conditions remain favorable for the downside.

• Also, the sell-off could lead the crypto market towards the $3.03 trillion support level.

• Note that this has been a key support area for TOTAL since November 20.

• A breakout of this level would trigger a sell-off towards the 200-day SMA at $2.72 trillion.

TOTAL/USD daily chart. Source: Cointelegraph/TradingView

On the contrary, a push for the cryptocurrency market cap to rise could take it back to $3.2 trillion or higher to test the aforementioned resistance level.

According to well-known analyst Crypto Zone,“The cryptocurrency market is in a neutral period,” with the Fear and Greed Index at 40.

The analyst added:“This shows that investors are carefully weighing their actions and now is a critical time for strategic decision-making. ”

U.S. Stocks Drag Down Crypto Markets

Following last week’s sharp declines, the major U.S. stock indices failed in their attempt to rebound Monday afternoon, with the Nasdaq closing down 1.2% and the S&P 500 down 0.5%.

Quinn Thompson, founder of Lekker Capital, a crypto hedge fund that specializes in trading using macroeconomic data, posted on social media: “I’m trying to get the message across to those who may be feeling complacent/in denial: Relative to where I think we can trade in 6-12 months, $95,000 is still not a bad exit price. ”

Thompson believes there is an 80% chance that Bitcoin will not hit a new high in the next three months and a 51% chance that it will not hit a new high in the next 12 months.

Speaking of the U.S. economy, Neil Dutta, head of economic research at Renaissance Macro Research, said risks to the labor market are increasing. Real income growth has slowed, the housing market has deteriorated, and state and local governments are cutting spending. What is worrying is that the market generally believes that the economy will not slow down, with the median GDP forecast being around 2.5%.

"If 2023 is a surprise to the upside, 2025 is more likely to be a surprise to the downside," Dutta wrote. ”

“Passive tightening of monetary policy is the main risk, which has important implications for financial market investors,” Dutta continued. “I expect long-term interest rates to fall and stock prices to fall as risk appetite weakens. For the economy, job market conditions are expected to deteriorate. ”

BTC is expected to fall to $70,000

BitMEX co-founder Arthur Hayes posted on social media that many IBIT holders are hedge funds who earn higher returns than short-term U.S. Treasuries by going long on ETFs and shorting CME futures. If the decline in BTC prices causes the basis (the gap between ETF prices and futures prices) to narrow, then these funds will sell IBIT and cover CME futures. These funds are currently profitable, and considering that the basis is close to the U.S. Treasury yield, they will close their positions during the U.S. trading session and realize their profits.I am expected to fall to $70,000.

Source: Coindesk, CoinTelegraph, Twitter