Bitcoin swiftly lost altitude early on Monday, dropping over 15% to below $50,000 before rebounding somewhat. The downward price movement came after bitcoin reached new record highs above $58,300 over the weekend.
The drop seemed to accelerate as U.S. Treasury Secretary Janet Yellen, speaking at a New York Times event, described bitcoin as “highly speculative asset” that is extremely inefficient for transactions. Yellen also called the amount of energy consumed in processing those transactions “staggering.”
The entire market followed bitcoin’s drop. Ether is down nearly 10% over the past 24 hours, trading at $1,770 after falling to $1,546, according to the CoinDesk price index. On Kraken, ether dropped to $700, a 64% crash. The decentralized finance sector of assets is down nearly 8%, per data from Messari.
Bitcoin, the top cryptocurrency by market value, rebounded to above $53,000 as of 15:12 UTC, representing a roughly 7% drop over 24 hours, according to CoinDesk 20 data.
The pullback could be extended further, as the recent rally looked overstretched, according to David Lifchitz, CIO for Paris-based quantitative trading firm ExoAlpha.
“A 15% correction could happen, taking some steam out of the hot market, before reaching new highs,” Lifchitz told CoinDesk. “The more upward parabolic and fast a move, the more fragile it is, so a pullback would be more than welcome.”
Indeed, bitcoin has seen a staggering price rally over the past four months, rising from $10,000 to nearly $60,000, with just one bull market correction in the second half of January.
The recent rise from $30,000 to $58,000 was even steeper, so a healthy cooling off of the market looks overdue – more so, as several technical analysis tools, including the widely tracked relative strength index (RSI), are signaling overstretched conditions with an above-70 reading.
“Technical indicators such as the RSI and Stochastics across numerous chart timeframes are indicating that the crypto asset is overbought, implying that we could soon see a retracement,” Simon Peters, an analyst at eToro, said in an email.
Peters also pointed to a bearish divergence on the technical chart, while warning of weakening upward momentum and potential for trend reversal that could see prices fall.
The MACD histogram, an indicator used to gauge trend strength and trend changes, has produced lower highs, contradicting higher highs on the price chart, confirming the bearish divergence.
Supporting the case for a price pullback are rising U.S. inflation-adjusted bond yields, as discussed last week.
The 30-year inflation-adjusted yield, or real yield, has turned positive for the first time since June 2020, and the 10-year real yield has risen to -0.80% from lows near -1.05% observed last month, according to data provided by the U.S. Treasury.
A continued rise in yields could push the U.S. dollar higher, putting selling pressure on equities and bitcoin. Stock markets are trading down at press time, with the S&P 500 futures nursing a 0.6% drop on the day.
How low might bitcoin go?
“The pullback can easily extend to the former resistance-turned-support near $42,000,” Joel Kruger, currency strategist at LMAX Digital, told CoinDesk. Markets typically shake out weak bulls with a drop to former hurdle-turned-support levels before extending bull runs.
Bitcoin turned lower from its then-record high of $41,962 on Jan. 8, establishing that level as crucial resistance and slipped to $30,000 in the following days. The newfound resistance was a scaled on Feb. 8 after electric maker Tesla announced its $1.5 billion bitcoin purchase.
Crypto analysts expect other corporates to emulate Tesla’s decision to buy bitcoin. However, they may look to invest on price pullbacks, according to Lifchitz.
“$50,000 looks like the first stop for a mild pullback, but a second leg down could take it down to $40,000, while the $30,000 zone looks like the ultimate bottom should things turn ugly in the short term,” Lifchitz said.
However, Patrick Heusser, head of trading at Swiss-based Crypto Finance AG, said $52,000 is major support, adding that a significant correction may remain elusive, as the derivatives market is no longer exhibiting excess bullishness.
Bitcoin’s average funding rate, or the cost of holding long positions in the perpetual futures listed on major exchanges, declined (normalized) below 0.08% early today, having peaked at multi-month highs above 0.12% last week, according to Glassnode data.
While analysts stand divided on possible magnitude of an impending correction, they expect the cryptocurrency to eventually go on to achieve new record highs above $60,000.
“We believe markets are displaying a healthy correction,” Dibb said. “Both BTC and ETH are still trading within an upward channel, and momentum is still skewed towards the bids.”
UPDATE ( Feb 22, 2021, 15:15 UTC): Updates prices in the second paragraph, adds effect on other assets, Yellen comments.