Bitcoin logged its worst plunge since March in the previous three sessions, stoking concerns among traders that its overheated price rally is beginning to lose steam.
The flagship cryptocurrency plunged 5.18 percent during the weekend and extended its correction by an additional 7.29 percent to $35,388 by 0916 GMT on Monday. At its intraday low, it was changing hands for $32,265. On the whole, the downside move marked Bitcoin’s biggest 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 Plunged
At the core of the cryptocurrency’s bearish correction was profit-taking, led by concerns ranging from its overbought status, the recovery in the US dollar index, and rising yields on the US 10-year Treasury benchmark note.
Traders appeared to have reallocated some of their profits into the cash and bond markets, primarily as the Federal Reserve hinted to reduce the size of its bond-buying program by January 2022, as per the minutes of their December meeting released on Wednesday.
That coincided with Bitcoin approaching its all-time high level above $41,000 two days later, creating ideal profit-taking and capital reallocation opportunity for traders.
“Time to take some money off the table,” Scott Minerd, the chief investment officer with Guggenheim Investments, said in a tweet Monday. “Bitcoin’s parabolic rise is unsustainable in the near term.”
Nevertheless, the latest Bitcoin price correction hasn’t deterred traders and investors from focusing on the cryptocurrency’s long-term outlook. That is due to a flurry of fundamental catalysts that expect to provide a backstop for bulls.
The Fed will turn to ‘taper tantrum‘ only after the US economy recovers to levels it seems as satisfactory. Chairman Jerome Powell has already admitted that they want to push the inflation rate above 2 percent. He has also said that his office would keep buying bonds at the same pace until they see substantial recovery in the US labor market.
Nevertheless, a broader recovery would only come after the US government’s commitment to providing additional fiscal stimulus. President-elect Joe Biden has confirmed that his first days in the White House would focus majorly on boosting the aid by trillions of dollars.
The prospects of a ballooning fiscal deficit would pressure the US dollar lower, at least in the medium-term. Traders and investors have positioned Bitcoin to behave as a safe-haven against the greenback’s potential decline. That partially explains its recent correction, which perfectly coincided with the dollar’s recovery in the last three days of trading.
US dollar index targets key resistance areas to confirm a bullish reversal. Source: DXY on TradingView.com
The US dollar index, which measures the greenback’s strength against a pool of foreign currencies, is now breaking out of its falling channel to the upside. It now targets two critical resistance areas, as shown in the chart above, expecting to roll back to the downside on bearish fundamentals.
“Bitcoin is the highest-beta beneficiary of the liquidity-driven quarantine+stimulus trade,” TDA Network’s Anchor Oliver Renick. “COVID curves peaking and [monopoly] handing off to fiscal is [a] more [important] catalyst.”
That puts the cryptocurrency back en route to $40,000.