Bitcoin registered its worst dip since March in the previous three sessions, sparking concern among traders that its overheated price hike is starting to lose momentum.
The flagship cryptocurrency submerged 5.18 percent over the weekend and extended the correction an additional 7.29 percent to $ 35,388 by 0916 GMT on Monday. At its lows during the day, it changed hands at $ 32,265. Overall, the downward move marked Bitcoin’s largest three-day decline since March.
Bitcoin's first major correction after its 100%-plus rally in three weeks. Source: BTCUSD on TradingView.com
Why Bitcoin collapsed
At the heart of the cryptocurrency’s bearish correction was profit-taking, led by concerns ranging from its overbought status, the recovery of the US dollar index, and rising returns on the US 10-year Treasury benchmark.
Traders seemed to have reallocated some of their profits to the cash and bond markets, mainly like the Federal Reserve hinted to reduce the size of the bond buying program by January 2022, according to the minutes of their December meeting released Wednesday.
That coincided with Bitcoin approaching its all-time high above $ 41,000 two days later, creating an ideal opportunity for traders to take profits and reallocate capital.
“Time to take some money off the table,” said Scott Minerd, the chief investment officer at Guggenheim Investments, said in a tweet Monday. “Bitcoin’s parabolic surge is unsustainable in the short term.”
Nonetheless, the latest Bitcoin price correction hasn’t stopped traders and investors from focusing on the cryptocurrency’s long-term outlook. That’s because of a wave of fundamental catalysts expecting to provide a backstop for bulls.
The Fed will turn to ‘tapered tantrumonly after the US economy has recovered to a level does it seem satisfactory. Chairman Jerome Powell has already admitted that they want to push the inflation rate above 2 percent. He has also said his office would continue to buy bonds at the same pace until they see a substantial recovery in the US labor market.
Nevertheless, a broader recovery would only come after the The US government’s commitment to provide additional fiscal stimulus. President-elect Joe Biden has confirmed that his early days in the White House would be mainly focused on raising aid by trillions of dollars.
The prospects of a rising budget deficit would put pressure on the US dollar, at least in the medium term. Traders and investors have positioned Bitcoin to act as a safe haven against the possible fall of the dollar. This partly explains the recent correction, which coincided perfectly with the dollar’s recovery over the past three trading days.
US dollar index targets key resistance areas to confirm a bullish reversal. Source: DXY on TradingView.com
The US dollar index, which measures the strength of the dollar against a pool of foreign currencies, is now breaking out of its downward channel upward. It is now targeting two critical areas of resistance, as shown in the chart above, expecting it to roll back down on bearish fundamentals.
Bitcoin is the beneficiary with the highest beta of the liquidity-driven quarantine +stimulus trade, ”Oliver Renick, anchor of TDA Network. “COVID curves are peaking and [monopoly] hand over to fiscal [a] Lake [important] catalyst. “
That puts the cryptocurrency back to $ 40,000 on the way.