March 2020 had been one of the worst for Bitcoin since the beginning of 2019, even though the prospects were favorable, and the most popular cryptocurrency was on its way up. However, a series of events, correlated with the latest coronavirus outbreak, had changed completely the market picture and now we find Bitcoin and most of the other cryptocurrencies on the defensive. For those of you that want to understand why Bitcoin dropped, here are three of the main reasons.
#1 Risk aversion
The market sentiment took a 180-degrees turn and it went from full risk on to risk-off mode. Risk assets (stocks, ETFs, and including cryptocurrencies) are not attractive anymore for investors, given that no one knows what the future might bring. With so many uncertainties in the horizon, Bitcoin is no longer a viable investment, due to its volatile nature. The part three years had been a major rollercoaster for it and with little sign of price stability, the Bitcoin sentiment was and still is very fragile.
#2 Massive liquidations
We already understood what is liquidity in the cryptocurrency market and that helps us further explain what happened during the past month. A report released by Chainalysis shows how there were massive amounts of Bitcoin that were sold on cryptocurrency exchange platforms. Investors had rushed to dump their tokens, afraid of the uncertain and that had acted as a compounding effect, since a lot of other had followed through. Panic selling had emerged and as a result, the price slumped towards the $4,000. At the time of writing, things had managed to stabilize, and Bitcoin is trading around $6,000. Still, that does not mean the selloff had ended completely.
#3 Trend-following flows
Since market participants don’t care about the long-term prospects for Bitcoin, trend-following traders had been very active. They were just looking at key technical levels and each time price broke below, they placed sell orders. This had further accelerated the bearish move, leading to an overextension. That’s the main reason why we’ve already seen a counter-trend move higher in the Bitcoin price. Fundamental analysis if out of the window and how the price behaves will influence heavily the market sentiment.
As we move forward, plenty of other factors could start to weigh heavily on Bitcoin. This could be the capitulation selling before the halving process and longer-term, a new bull run will start again. We must wait and see how time will bring and in the meantime, technical analysis will be the only game in town.