Crypto market drops, but analysts predict new era for Bitcoin and Co.

During Monday's trading session, the cryptocurrency futures market experienced significant turbulence, resulting in losses exceeding $500 million in liquidated positions for highly leveraged long and short trades. The intense volatility affected major cryptocurrencies, with some witnessing drops as substantial as 12%.

Bitcoin (BTC) traders were in for a roller-coaster ride as the original cryptocurrency oscillated between $43,000 and a low of $40,300, wiping out almost a week of gains and exerting a downward pull of the wider crypto market, including prominent tokens like Chainlink (LINK), Cardano (ADA), and Solana's (SOL), which saw declines exceeding 8% before a modest recovery. Notably, riskier assets such as Shiba Inu (SHIB) and Dogecoin (DOGE), both meme tokens with dog themes, experienced a comparatively milder 5% drop. In contrast, Avalanche (AVAX) managed to buck the trend, registering gains of up to 20% despite Bitcoin's weakness.

Over $500 million in 'rekt' positions liquidated

The market downturn led to losses of nearly $475 million in long positions (bets on higher prices) and $73 million in short positions (bets against), reflecting a general unwinding of leveraged positions amid elevated funding rates, creating an unstable market environment.

Liquidations transpire when an exchange forcibly closes a trader's leveraged position due to a partial or total loss of the initial margin. This occurs when a trader cannot meet the margin requirements, lacking sufficient funds to sustain the open trade.

What caused the crash?

There is no simple answer as to why the market started the week with such a sharp correction, but there could be several factors at play.

Firstly, traders could simply be taking profit and cashing in on the week's gains, which creates pressure to sell. Another issue may be an excess of leveraged positions in the market. When traders employ excessive leverage, they are essentially engaging in trades with borrowed funds. While leverage can be advantageous, it comes with risks that can be detrimental when the market turns unfavourable. In the event of price drops, these traders are at risk of being completely wiped out, i.e., liquidated, which can have a significant impact on the broader market. 

Does Bitcoin still have a future? All fundamentals point to yes

Despite the recent market upheaval, most market analysts are still bullish on Bitcoin, pointing to the range of recent developments in the Bitcoin ecosystem, including Ordinals and Layer-2 solutions, the high level of interest in Bitcoin spot exchange-traded funds (ETFs), and the next halving event anticipated in Q4 2024.

BTC prices started moving upward again in October after nearly half a year of sideways price action, gaining around 50% within the last month and 150% since the start of this year. On-chain data also shows evidence of whale accumulation, with consistent BTC purchases by accounts holding over 1 BTC. 

Institutional investors are increasingly throwing their weight behind Bitcoin, and so are sovereign nations. El Salvador's eagerly awaited Bitcoin bonds, referred to as "Volcano Bonds", have reportedly obtained regulatory approval for their introduction in early 2024.

The Digital Assets Commission of El Salvador has purportedly given the green light to the Volcano Bond, with an expected launch slated for the first quarter of 2024, as outlined in a statement from the country's National Bitcoin Office (ONBTC) on 11 December.

El Salvador marked a significant milestone on 11 January by enacting groundbreaking legislation that established the legal framework for the Bitcoin-backed bond. The primary purpose of the Volcano Bond is to retire sovereign debt and finance the development of the country's proposed "Bitcoin City", with the name of the bond being a reference to President Nayib Bukele's plan to leverage volcanic energy to power Bitcoin mining.

All things considered, things don't look bad for BTC in the long term. Despite being the oldest cryptocurrency, with many pretenders to the throne competing on utility, energy efficiency, or meme factor, Bitcoin is demonstrating remarkable resilience as both a digital asset and a platform. 

Staying cool during the market correction

Veteran traders will already be well aware of this, but everyone with positions in the crypto market should be prepared to take a deep breath and calmly weather this latest wobble in prices. 

Volatility returning to the digital asset market can be seen as a positive sign. After all, volatility is why crypto made so many overnight millionaires and excited investors around the world in the first place. A market correction is normal after a bullish surge, and after the weaker and over-leveraged positions have been liquidated, a period of stable gains has often followed. Volatility can swing both ways, and the wise trader will watch the crypto market and the wider macroeconomic environment to take advantage of the next trend.

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