Why is the price of Bitcoin falling

Last night the price of Bitcoin collapsed below $25,700, but why is it falling? What are the main causes?

In reality, the decline had started on 15 August, when from above $29,300 it had fallen as low as $29,000. 

The next day it also fell below $29,000, but yesterday was the day of the real collapse

It is worth mentioning that although we can talk about a collapse, this is not an abnormal event. Collapses such as these have been experienced by the price of Bitcoin dozens, if not hundreds, times over the course of its fourteen-year life, with the last one occurring only two months ago. 

Neither the magnitude of the decline nor the speed with which it has occurred are anomalous. In other words, for now it is all within the norm of what is and remains a decidedly volatile asset.

Why the price of Bitcoin is falling: the volatility factor

The key point is indeed the volatility

The abnormal thing is not yesterday’s collapse, but the fact that basically since 21 July the price of BTC has fluctuated within a very compressed range, between $29,000 and just over $30,000 with rare excursions above $31,000, for almost a month straight. 

In other words, until 15 August it was making record lows in volatility over the 30 days, so much so that many expected that such a streak of low volatility would sooner or later be broken with a sharp jump up or down. 

Moreover, historically in recent years July has always been a low volatility month, while in August volatility has then increased. 

2023 was no exception, with a July with volatility so low that it set real records, followed by an August with a significant increase in volatility. 

The other markets

Perhaps the most interesting thing to analyze is the relationship with other markets, especially the stock market/ 

Indeed, although Bitcoin is often compared as a financial asset to gold, it remains a risk-on asset, unlike the precious metal. In this respect it is therefore much more similar to the stock market, the risk-on market par excellence. 

For several days now, the stock market has been in trouble. 

Starting with the Nasdaq, it is worth mentioning that in mid-July it broke the winning streak that, starting in mid-March, had gained it 29% in four months. 

Instead it has lost 7% over the past 30 days, with -1.2% yesterday alone. 

These are not hikes similar to those of Bitcoin’s price, but it gives a good idea of the fact that it is the risk-on markets in general that have been suffering lately. 

For example, since 15 March. the price of Bitcoin has done first +31% and then -16%, which is a performance reminiscent of that of the Nasdaq, but with a greater loss in the last thirty days. However, it should not be forgotten that compared to the beginning of the year Bitcoin is still at +60%, while the Nasdaq at +29%. 

Very similar reasoning also for the S&P500, which is has been losing only 5% in the last thirty days. 

However, even more interesting is the comparison with the Hong Kong Stock Exchange’s Hang Seng Index (HSI), since China is the special watcher at the moment. 

HSI is losing 1.7% since yesterday, and in the last thirty days it has lost 11%, which is not much less than the price of Bitcoin. 

Moreover, in August it has already had as many as four significant collapses, one on 2 August, one on 8, one on 14, and one between yesterday and today. The one on the 14th also seems to have weighed on Bitcoin’s price, effectively starting the current phase of decline. 

The selling pressure

Hence it seems quite evident that there is some form of correlation going on, probably indirectly, between the performance of the stock market and that of the price of Bitcoin. 

In particular, what caused the collapse yesterday were massive sales of BTC. 

Many have speculated about the cause of these massive sales, but it is possible that there is no single exact cause. What is known is that the macroeconomic situation does not look good, and that many investors are afraid of further collapses. 

This has also created fear in the crypto markets, triggering a small wave of panic that generated massive selling yesterday. In particular, hundreds of millions of dollars were liquidated in a matter of minutes on the futures markets. 

It should not be forgotten that trading volumes in recent weeks were particularly low, and when such a condition occurs it takes relatively little to trigger strong price movements. 

The single piece of news that probably had the greatest impact was the declaration of bankruptcy of the Chinese real estate giant Evergrande. 

It had actually been known for almost two years that the company was in danger of bankruptcy, but given that it is a veritable behemoth, and that a real estate speculative bubble is probably underway in China, this news generated some panic. 

The main drop in Bitcoin’s price occurred shortly after the US exchanges closed, and a few hours before the Chinese exchanges opened. 

It is very likely that the almost sudden drop from $27.50 to $25,200 occurred at the same time as the news of Evergrande’s bankruptcy spread. 

In fact, a few hours later, when the Hong Kong exchange opened, the price of BTC had already risen to $26,700, and the Asian exchange opened with only a slight decline. 

After all, Evergrande’s bankruptcy was widely expected for some time, but it is fears of a ripple effect that are rattling the markets. 

After losing 1.2%, the Hong Kong stock exchange was temporarily halted due to excessive declines, only to reopen and lose further. 

Now the question is: Is the worst really over, as it would seem at the moment? Will China be able to avoid contagion? 

Since they have had almost two years to prepare, the possibility that they will be able to contain the crisis seems to be there.