Market Byte: Bitcoin’s Sudden Selloff

Last Update 08/18/2023

Bitcoin’s sharp decline likely started with macro catalysts, and accelerated on liquidations of leveraged long positions on exchanges.

Bitcoin (BTC) and other major tokens fell sharply over the last two days following a period of low volatility in digital asset markets. The nearly 9% price drop was the largest since early November 2022 amidst the collapse of crypto exchange, FTX.¹

The initial drawdown appeared related to macro factors. Prior to the last two trading days, bitcoin had remained in a narrow range of roughly $29-30k, despite widespread weakness in global asset markets. Both equity and bond markets have sold off this month due to, in our view, concerns about China’s economy and pressure on bond markets from wide budget deficits and the Fed’s quantitative tightening. We suspect that the synchronized selloff in equities and fixed income eventually spilled over into crypto as crossover investors reduced portfolio risk (Exhibit 1).

Exhibit 1: Selloff began before crypto-specific news; likely triggered by macro catalysts

The decline in prices accelerated on Thursday, August 17th, after the Wall Street Journal reported that SpaceX “wrote down the value of bitcoin it owns by a total of $373 million last year and in 2021 and has sold the cryptocurrency”. Although these sales may have occurred much earlier (the article did not specify the timing), the news appeared to contribute to bearish sentiment in the market. As prices broke out of their recent range, exchanges liquidated leveraged long positions that were now underwater. For example, Glassnode data show that liquidations of long BTC positions in futures surged to $214mn on Thursday—the highest since January 2022 (Exhibit 2). The liquidations were clustered in a short window between 5:30pm and 5:50pm Eastern Time on Thursday, aligned to the steep decline in prices around that time.²

Exhibit 2: Drop in prices triggered liquidations of leveraged longs

The selloff abated Thursday evening–with BTC rebounding from an intraday low of $25.3k³–when liquidations paused and after Bloomberg reported that the SEC is expected to approve ETF products linked to Ethereum (ETH) futures.⁴ The article noted that these products could be listed as soon as October. The news helped stabilize the market and supported ETH in particular: the ETH/BTC trading pair jumped nearly 6% from its intraday lows.⁵

Although we see a variety of positives for the digital asset industry over the coming months, the macro markets backdrop remains challenging and may continue to be a source of price volatility.

^{1. Based on 5pm closing price on August 16 to mid-morning prices on August 18. Source: Bloomberg.}

^{2. Source: Glassnode.}

^{3. Source: Bloomberg.}

^{4. “SEC Set to Greenlight Ether-Futures ETFs in Crypto Industry Win”, Bloomberg, August 17 2023.}

^{5. Source: Bloomberg.}

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