What Caused Bitcoin's 10% Crash: Matrixport? Jim Cramer? Leverage?

Bitcoin's (BTC) swift Wednesday decline reminded investors of the asset's downside volatility, with observers quickly pointing to a research report predicting rejections for highly-anticipated spot BTC exchange-traded funds in the U.S. and even CNBC host Jim Cramer's comments as potential triggers,

However, overzealous bullish bets on a continued rally primed the market for a pullback, analysts told CoinDesk.

BTC dropped to a low of $40,800 from around $45,000 within hours during early Wednesday, CoinDesk Indices data shows, roughly around the time when Singapore-based digital asset firm Matrixport published a report penned by Markus Thielen forecasting the U.S. Securities and Exchange Commission to reject all spot bitcoin ETF applications, overturning its Tuesday outlook projecting an imminent approval and a BTC rally to $50,000.

Jihan Wu, co-founder of Matrixport, said the report was unlikely to trigger the crash and pointed out weakness in crypto-related stocks over the past days, potentially foreshadowing faltering momentum for digital assets.

"It's unrealistic to believe that a Matrixport report could trigger a trillion-dollar size market to crash," Wu posted on X Wednesday late afternoon UTC time.

"We also experienced an unexpected drop in crypto stocks for consecutive trading days, while Bitcoin's price remained stable," Wu added. "These events, predating Markus [Thielen's] report, appeared to have less impact and got less attention."

Analysts refuted Matrixport's contrarian argument, saying there was no evidence that the regulators would reject the applications and giving higher odds for an eventual approval. Consequently, bitcoin's price recovered from Wednesday's lows to around $42,900 by afternoon UTC time, but was still trading nearly 5% lower over the past 24 hours.

The rapid decline came within a day of CNBC host and former hedge fund manager Jim Cramer's positive comments about bitcoin, walking back on his negative outlook in October. While it's unlikely to be, observers didn't fail to single out his comment in hindsight as a sign for falling prices, riffing on a popular meme of Cramer's internet-famous track record of backfiring takes. (For instance, BTC is still up roughly 60% since his October remark.)

Read more: Jim Cramer Doesn't Know Bitcoin

K33 Research Senior Analyst Vetle Lunde said the market was overheated and over-leveraged, leaving it highly vulnerable to the downside.

"Leverage in the market was very high prior to the crash, with longs being the key aggressor, evident by funding rates and futures premiums pushing to annualized rates above 50%," Lunde explained in an interview via email. "This left the market extremely exposed to downside volatility."

Matrixport's out-of-consensus report served as an adequate catalyst to unwind overleveraged positions leading to cascading liquidations, exacerbating the downfall. Nearly $560 million of leveraged long derivatives trading positions – bets on higher prices with borrowed money – has been wiped out through Wednesday until press time, the highest amount in at least three months, CoinGlass data shows.

"[It's] a typical long liquidation flush," Lunde said.

Digital asset research firm CryptoQuant also attributed the decline to exceptionally high funding rates on the bitcoin futures market, adding selling pressure from bitcoin miners and high profit rates of short-term holders as contributing factors.

CryptoQuant analysts last week said that a spot bitcoin ETF approval is likely to happen and potentially be a "sell the news" event that could pull BTC to $32,000.

LMAX strategist Joel Kruger said in an emailed note that the overwhelming consensus is that an approval for a bitcoin ETF in the US is "a matter of when, not if."

K33's Lunde was of a similar opinion, saying that a denial seems highly unlikely based on Grayscale's court win, and all back-and-forth between the SEC and issuers leading to updated S-1s and cash creations."

Read more: Bitcoin ETF Looks Very Likely Given These Bureaucratic SEC Steps

LMAX's Kruger opined that Wednesday's pullback is likely a short-term price movement and expects a 10% bitcoin rally within one-two days of the approval's announcement and all-time high prices later this year.