Bitcoin On The Ropes

The current sell-off in Bitcoin has seen the market sliding more than 30% from the all-time highs printed in October. The decline has now broken through the 50% Fib retracement from YTD lows and has surpassed the scale of the last big correction seen in September. Given that volatility is an accepted feature of crypto trading, the initial breakdown wasn’t question too heavily with crypto twitter alive with diamonds emojis (a reference to the “diamond hands” term used by those who intend to hold despite the sell-off). However, as the sell off as developed further, many smaller and newer Bitcoin traders are now wondering whether this is the start of a much bigger reversal.

USD Rally Weighing

In terms of the catalyst behind the sell-off, the big factor has been the uptick in USD recently. Even more specifically, the uptick in expectations that the Fed will step up the pace of its tapering operations, leading to rate hikes coming sooner than expected next year. In that sense, Bitcoin ( as the crypto coin with the biggest market cap) is behaving a lot more like traditional risk assets behave. This likely reflects the much larger engagement from the institutional sector over the last year.While Bitcoin is not backed by any physical assets or pegged to any currency, one of the big draws was it supposedly traded in a de-linked manner, compared with traditional currencies and assets. However, this dynamic appears to be shifting as the market becomes more mature.

Fed In Focus

Looking ahead then, the actions of the Fed are clearly a key theme to watch in terms of gauging the likely direction of Bitcoin. This week holds the December FOMC and with expectations geared towardsa hawkish outcome, there are risks that we see Bitcoin take another leg lower if the Fed increases the pace of its tapering and revises higher its economic forecasts. The key aspect to watch will be the Fed’s dot plot forecasts. If the projected rate path is revised higher and brought forward, this will be a big boost for USD and will likely see Bitcoin under heavy pressure near term. On the other hand, if the Fed disappoints USD bulls this week, there is ample room for a sharp reaction higher in Bitcoin.

Larger Bitcoin Holders Buying The Dip

Interestingly, it is worth noting some other market developments that are key to Bitcoin trading. The recent decline in Bitcoin has cleared out a lot of weaker positions and those late to the party with open interest now back down to around levels seen ahead of each of the last major upside moves in Bitcoin. Additionally, exchange data provided by Bitfinex shows that traders have been adding to long positions into this decline. This is in line with other recent reports showing that some of the larger Bitcoin holders (known as whales) have been increasing their holdings throughout this dip, again suggesting that we might yet see another move higher.

Technical Views

Bitcoin

Following the failure at 67720, price has been moving within a well-defined bear channel. Price is currently testing below the 47776 level support and the 50% retracement from YTD lows. While below here, the focus is on a deeper push lower towards 40990 and the channel low. Ahead of there, the 61.8% retracement at 44195 is also key to note. To the topside, the key levels for bulls to break is the 52930 level.