Why Did Crypto Drop: As Bitcoin Falls Below $90,000, the Market Goes Into Panic Mode

Last week, the crypto market experienced significant negative pressure. Bitcoin rapidly declined from its record high above $126,000 to $90,200, and this sharp drop also caused the broader crypto ecosystem to lose value. This sudden movement created deep panic among investors’ sentiments, beyond just price level changes.

Sharp Drop in Bitcoin: Rapid Pullback from 126,000 to 90,000

The question of why cryptocurrencies fell over the past seven days has become the most obvious issue in the crypto market. Major cryptocurrencies, including Bitcoin, lost an average of 5% to 6% in value throughout the week. Bitcoin, the largest crypto asset, especially failed to hold a crucial level. Trading at levels not seen since early March, BTC also declined to $90,200 in the last 24 hours. The broader crypto market, measured by the CoinDesk 20 index, was also affected by these movements, experiencing a weekly decline of approximately 5.8%.

Market Sentiment at Record Levels: Fear and Greed Index at Historic Low

The Fear and Greed Index, the most reliable barometer of investor sentiment, is very instructive in understanding why cryptocurrencies fell. The index has fallen to a level of 10, entering the “extreme fear” category. This reading is the lowest since late February and represents the worst sentiment in about nine months. The sharp decline in the index clearly indicates that investors are becoming hesitant and their risk appetite has diminished to a minimum.

Why Did Cryptocurrencies Fall: Macro Uncertainty, Institutional Outflows, and Liquidity Crisis

Multiple factors lie behind this sharp decline in the market. Nansen’s Senior Research Analyst Jake Kennis stated in an email: “The sell-off is a combination of factors including selling pressure, profit-taking by long-term holders, institutional outflows, macro uncertainty, and the unwinding of leveraged long positions.”

On the macro front, the likelihood of a rate cut from the Federal Reserve has decreased. According to CME’s FedWatch tool, the probability of a 25 basis point rate cut this month is around 50%. Prediction markets like Kalshi and Polymarket also assess similar probabilities. Additionally, the recent government shutdown has delayed critical economic data, including October inflation, complicating investors’ decision-making processes.

Furthermore, the “structural liquidity problem” in the market has intensified this movement. The market, which has not fully recovered from its major crash in October, is affected by the structurally low depth of order books on centralized exchanges. In this low-liquidity environment, sell orders push prices down more rapidly.

$625 Million Leveraged Positions Cleared: Liquidity Issues Increased Market Volatility

The increase in crypto market volatility has also led to significant liquidations of leveraged positions in derivatives markets. Over the past 24 hours, more than $625 million worth of leveraged crypto positions have been liquidated among approximately 150,000 investors. Hyperliquid experienced the largest single liquidation event, with $40.22 million in ETH-USD positions, resulting in about $220.8 million in total losses from short positions that benefited from the price rebound.

This wave of liquidations is a consequence of macro factors such as U.S. trade policies, bond market volatility, and expectations of steps by world leaders at the Davos economic forum. It also highlights once again the risks associated with aggressive leverage use in such volatile markets.

In short, the answer to why cryptocurrencies fell is not attributable to a single factor. Macro uncertainty, institutional flows, low liquidity, and position unwinding are among many elements shaping the current state of the crypto market. Market participants need to pay more attention to careful position management and risk control during this volatile period.