Bitcoin Drops After Flash Crash. Why Prices Could Keep Dropping.

The price of Bitcoin has fallen 6% over the past 24 hours to $62,600, with the largest digital asset trading as low as around $62,350 in a recent trough. Bitcoin has corrected lower since hitting a record high close to $74,000 last week, a record level that came just a week after the token blew through its November 2021 peak near $69,000.

“Bitcoin is down [at] its lowest level in two weeks,” said Alex Kuptsikevich, an analyst at broker FxPro. “A close below $65,500 would signal a move to a deeper level—the classic 61.8% retracement of the rally with a potential target near $60,000.”

Current price action looks like a short-term—but not insubstantial—correction across crypto, with profit-taking among long-term holders possibly being a driving factor behind the move lower. A factor injecting volatility into Bitcoin may be variable liquidity across trading venues, with at least one recent instance of a flash crash. A flash crash is a phenomenon where an asset at least briefly trades far below its typical market price, often as a result of automated trading strategies and mismatches in liquidity or a very unequal ratio of buyers to sellers.

Liquidity is critical factor in markets that allows assets to be bought and sold quickly without drastic moves in prices. Crypto liquidity had suffered drastically since the collapse of exchange FTX in late 2022, but the latest digital asset rally has brought Bitcoin’s market depth—a key measure of liquidity—back to its pre-FTX average, analysts at crypto data provider Kaiko wrote in a note on Monday.

Nevertheless, not all trading venues are created equal, and variable liquidity may be seen across markets at a time of significant change for Bitcoin because of the launch of new spot Bitcoin exchange-traded funds (ETFs). This may be contributing to choppy trading and could see more flash crashes if Bitcoin continues to sell off.

“Overnight on one exchange (BitMex), Bitcoin crashed down to $8,900 due to a large number of sell orders totaling $55.5 million,” analysts at Bespoke Investment Group wrote in a note Tuesday. “For an asset class that is worth over $1 trillion, a $55 million sell order causing a crash of that magnitude certainly doesn’t suggest a lot of liquidity.”

That said, many market participants remained optimistic about the longer-term outlook for Bitcoin.

For one, Bitcoin continues to be buoyed from inflows into spot Bitcoin ETFs, which were approved by U.S. regulators in January and have ushered in a fresh wave of investor interest in cryptos. Digital asset investment products had record weekly inflows of $2.9 billion last week, pushing year-to-date inflows to $13.2 billion, according to data from asset manager CoinShares.

Moreover, a reduction in Bitcoin issuance is looming, with the so-called halving set to take place next month, cutting the release of new tokens and tightening supply at a time when demand has been rising—likely adding support to prices.

Resilient risk sentiment in wider markets, where the S&P 500 and Nasdaq stock indexes remain near their own record levels, also bolsters cryptos, which are sensitive to wider risk appetite. That said, a pullback in tech stocks amid a risk-off mood in markets on Tuesday could be another short-term weight on token prices.

Beyond Bitcoin, Ether

ETHUSD

-2.13%

—the second-largest crypto by market value—lost 8% to fall to $3,250, having traded above $4,000 last week. Smaller tokens, or altcoins, also were weak with Cardano

ADAUSD

-1.45%

down 6% and Polygon plunging 9%. Memecoins were not spared with Dogecoin

DOGEUSD

-2.54%

dropping 9% and Shiba Inu

SHIBUSD

-2.84%

shedding 7%.

Write to Jack Denton at jack.denton@barrons.com