Bitcoin dropped from $37,000 to below $29,000 within 48 hours and in the process recorded the biggest daily red candle in its history. For some time now, Bitcoin has failed to break back above $35,000 sustainably and it fell below $29K on January 22.
Bitcoin has managed to recover some losses since the drop and it is currently consolidating above $31,000. Nonetheless, at these prices bitcoin seems to be headed for its worst week ever. It has lost over $5K in the last four days, as the bulls try to establish $32K as the new support.
There are three key reasons why the price of bitcoin plunged so deeply. First, the options market was overheated with increasing put options. Also, a crucial resistance area was rejected repeatedly. Thirdly, the speed of the sell-off may have resulted in a panic plunge in a short period.
Options Markets Recorded More Puts
There are two types of contracts in the options market: calls and puts. Calls are buy orders and puts are sell orders. According to one data analytics platform, Laevitas, the options market has $3.1 billion in notional open interest with short-term put volume rising. They stated:
“1 week left until the 29JAN contract expires on Deribit Exchange with over $3.1b in notional open interest. Max pain stands at $28k – the meme becomes reality? Put volume picking up since yesterday especially for near-term options.”
Today, the options market accounts for almost 33% of the futures market’s open interest. With more than $3 billion in open interest, the options market can have a considerable impact on the bitcoin price.
Key Resistance Rejected, What Comes Next?
The $35,000 level was a crucial short-term resistance zone. As soon as bitcoin rejected the level, it quickly dropped below $30,000. One crypto analyst, Scott Melker, said that BTC swept the lows, although it dipped below the past support zone. Thus, in case the bullish structure remains strong, a rally back to $35,000 is a probability. He stated:
“As usual, the wick went a bit deeper than expected, but it’s following the plan. Swept the range lows into the box, bullish SFP, and move up. Solid volume on the SFP. I drew this yesterday and shared it live, don’t @ me about hindsight. Not out of the woods yet.”
In the short term, traders might be watching the $35,000 zone for the confirmation of where bitcoin will go next.
As bitcoin plunged below $33.5K, the zone where the previous support had formed, a panic sell-off kicked-off. Notably, the Crypto Fear and Greed Index plunged to ‘fear’ for the first time since October 2021 after it had spent months in the ‘extreme fear’ area.
One pseudonymous trader by the name Kaleo insisted that the market sentiment in cryptocurrency seems to shift quickly. He stated:
“If #Bitcoin dips to the low 20Ks, it’ll be just low enough that all of your friends and family who bought the past few weeks will hate you. They’ll never want to touch $BTC again… only to ask if it’s a good time to buy more at $50K or if they should wait for another dip.”
Nonetheless, one bullish catalyst for BTC in the short term is the constant accumulation of bitcoin by Grayscale. On January 19, the fund acquired a staggering 16,244 BTC ($607 million) in one day to its holdings. That amount is 18 times the total amount of new bitcoin that is mined in a day.