bitcoin price has fallen below the critical support level of $60,000, hitting a low of $57,914. Since Tuesday, bitcoin has seen a further 7% drop, reinforcing the ongoing downtrend. Currently, market sentiment is noticeably shifting to the bearish side.
Is a bitcoin crash like May 2021 coming?
Andrew Kang, co-founder of Mechanism Capital, has x.com/Rewkang/status/1808545114622677300″ target=”_blank” rel=”nofollow”>increase Significant concerns are raised regarding the pattern emerging in the bitcoin market, reminiscent of the conditions that led to the dramatic crash in May 2021. In a detailed analysis shared via x (formerly twitter), Kang highlighted the overlooked criticality of the current market dynamics.
Kang stated: “Most market participants do not appreciate the significance of a potential 4-month range breakout in bitcoin. The closest parallel we can draw is the May 2021 range breakout, where we also broke out of a parabolic rally in btc and altcoins.”
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He pointed to similarities in market conditions, particularly in terms of leveraged positions, which currently exceed $50 billion. “This figure does not include the Chicago Mercantile Exchange (CME), which is higher, but is compounded by the fact that in this scenario we have been swinging even longer (18 weeks vs. 13), and we have not yet had extreme losses, whereas we had some in the midst of the 2020-2021 bull market,” Kang explained.
Kang also adjusted his projections for bitcoin’s bottom, suggesting a steeper drop than previously anticipated: “My initial estimates of low $50k were likely too conservative and we see a more extreme reset to $40k.” He warned that such a pullback could significantly damage the market, requiring a few months of consolidation and a downtrend before any reversal to an uptrend is conceivable.
In a dialogue with Alex Krüger, a well-known macro and cryptocurrency analyst, the discussion explored the complexities of open interest (OI) in the derivatives market, a crucial aspect of understanding market sentiment and directional biases. Krüger noted, “However, much of that OI is non-directional,” suggesting more complex market behavior than straight long and short positions.
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In response, Kang clarified the composition of OI, saying, “Each unit of OI is one long + one short position. Even if there are short positions at the bottom of the short leg, there is a directional long position at the other end. So yes… fewer directional short positions.” The conversation delved into whether derivatives traders are delta neutral, which affects market stability.
Krüger asked about market makers’ positions, and Kang replied: “I can assure you that there are not many market makers in the OI who are delta-neutral long perps and spot short perps paying funding/borrowing on both ends for a negative carry trade.”
What happened in May 2021?
This ongoing debate among experts reflects growing concern over the possibility of a repeat of the May 2021 crash. During that period, the price of bitcoin plummeted sharply after a peak of around $64,000 in mid-April 2021. By the end of June, it had lost around 56% of its value. This crash was precipitated by a combination of factors, including regulatory measures in China, environmental concerns expressed by influential figures such as Tesla CEO Elon Musk, and a resulting cascade of panic selling among retail and institutional investors.
In retrospect, the May 2021 downturn was characterised by a rapid shift in investor sentiment, driven by external shocks and exacerbated by high levels of leverage in the market. Today, according to Kang, similar conditions could be forming, with high leverage and prolonged periods without significant price corrections, suggesting that the market may be on the verge of another severe downturn.
At the time of writing, btc was trading at $58,736.
Featured image created with DALL·E, chart from TradingView.com
