The recent sharp drop in Bitcoin from its early October highs has led to a significant erasure of this year’s gains. The cryptocurrency fell to \$80,000 on November 21 before stabilizing around \$86,000. According to Deutsche Bank analysts Marion Laboure and Camille Seaman, this correction is driven by a confluence of macroeconomic and market factors. As a result of this dynamic, the market capitalization of cryptocurrencies has shrunk by approximately \$1 trillion. The analysts highlighted five key reasons for the recent Bitcoin correction: 1. General Stock Market Decline and Risk Aversion: Bitcoin fell in tandem with global risk assets like stocks due to concerns surrounding a potential US government shutdown, renewed US-China trade tensions, and worries over AI valuations. Bitcoin’s correlation with major US indices (Nasdaq 100 and S&P 500) has risen this year to 46% and 42%, respectively, indicating its transformation from an uncorrelated store of value into a high-beta technology stock. 2. Tightening of US Monetary Policy: Despite a 25 basis point rate cut in October, the Federal Reserve’s (Fed) rhetoric caused market jitters in the crypto space. Statements by Chair Jerome Powell that a further rate cut in December is not guaranteed, along with comments from Governor Lael Brainard suggesting uncertainty about future rate cuts, increased pressure on Bitcoin. 3. Regulatory Uncertainty and Delay of the CLARITY Act: The summer momentum in the crypto market faded due to the delay in the Senate passing the CLARITY digital asset bill, as well as political disagreements over decentralized finance (DeFi) regulations. 4. Institutional Outflows and Decreased Liquidity: Exchange liquidity notably decreased during the October 10 sell-off, leading to increased Bitcoin volatility. Institutional investors began pulling funds from Bitcoin instruments and ETFs, contributing to an approximate 24% drop in overall crypto market capitalization from its peak. 5. Profit-Taking by Long-Term Holders: Long-term holders sold over 800,000 BTC in the last month, the highest level since January 2024. Rising volatility and the general market downturn prompted even seasoned investors to reduce their risk exposure. Deutsche Bank notes that this decline was different from previous episodes because even long-term Bitcoin holders began selling their assets, amplifying the short-term bearish momentum.
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