What Caused Bitcoin’s Drop to $85,000 and Could Prices Fall Further?

Bitcoin’s price fell sharply from around $95,000 to approximately $85,000 in early June 2024, a move linked to significant shifts in global macroeconomic policy and market dynamics. Understanding the interplay between the Bank of Japan’s policy changes, crypto market liquidity, and leveraged liquidations is key to assessing Bitcoin’s recent volatility and potential future price behavior.

What happened

In early June 2024, Bitcoin’s price declined rapidly from near $95,000 to about $85,000, marking a notable correction in the cryptocurrency market. This drop coincided closely with the Bank of Japan’s decision to end its Yield Curve Control (YCC) policy, which had previously capped yields on 10-year Japanese Government Bonds (JGBs). The removal of the YCC caused yields to rise, triggering a shift in global bond markets and heightened volatility in risk assets, including cryptocurrencies. Reuters reported this as a significant macroeconomic event that reverberated through financial markets.

Simultaneously, the crypto market experienced large-scale liquidations of leveraged positions. According to Glassnode data, forced selling through margin calls and stop-loss triggers compounded the downward pressure on Bitcoin’s price. This mechanical factor intensified the initial shock from the macroeconomic shift, creating a cascade effect in the market.

CoinDesk analysis highlighted that the crypto market’s liquidity cycle was also a contributing factor. Reduced inflows and tighter liquidity conditions during this period amplified price volatility. The convergence of these liquidity constraints with macroeconomic shocks and leverage liquidations created a complex environment for Bitcoin’s price action.

Interpretations from Reuters suggest that the BoJ’s policy change acted as a global macroeconomic shock that shifted investor sentiment toward risk aversion, prompting a reduction in exposure to volatile assets such as Bitcoin. While some market commentators, including MarketWatch, have proposed that the BoJ’s move disrupted yen-funded carry trades, thereby impacting crypto markets, this remains speculative and is not confirmed by firm data.

Why this matters

The events underline the increasing sensitivity of Bitcoin’s price to traditional financial market policies and global macroeconomic developments, challenging the notion that crypto assets operate independently from broader market forces. The BoJ’s exit from YCC, a major monetary policy shift, demonstrated how central bank decisions can ripple across asset classes, influencing investor behavior in digital assets.

Moreover, the role of leveraged liquidations exposes structural vulnerabilities within the crypto market. Forced selling magnifies price movements, suggesting that leverage cycles remain a critical factor in Bitcoin’s volatility. This dynamic, combined with liquidity constraints, could result in amplified price swings during periods of macroeconomic uncertainty.

Understanding these interconnections is important for market participants and policymakers. It indicates that Bitcoin’s price dynamics are not solely driven by crypto-specific factors but are increasingly integrated into the global financial ecosystem. This integration could have implications for risk management, regulatory oversight, and the evolution of crypto market infrastructure.

What remains unclear

Despite the correlations observed, the precise causality between the BoJ’s policy change and Bitcoin’s price drop is not fully established. It is unclear to what extent the price movement was directly attributable to the BoJ decision versus broader shifts in global risk sentiment. The aggregated nature of liquidation data and lack of granular timing analysis limit the ability to definitively link specific market events.

Additionally, the sustainability of current liquidity conditions in crypto markets remains uncertain. The timing and scale of potential inflows that could stabilize prices are not specified in available sources. The influence of other central banks’ monetary policies during this period is also not isolated, leaving open questions about their combined effect on Bitcoin’s price.

Finally, while some analysts mention disruptions to yen carry trades affecting crypto, this narrative lacks firm empirical support in the cited research. Structural changes in crypto market leverage and liquidity cycles that might alter future volatility patterns are not yet clearly identified or quantified.

What to watch next

• Announcements or adjustments in monetary policy from major central banks, including any further changes from the Bank of Japan, which could influence global risk sentiment and asset prices.
• Detailed data releases on crypto market liquidity and inflows to assess whether tighter conditions are easing or persisting.
• Reports or disclosures from institutional investors and major Bitcoin ETF issuers regarding their trading activity and exposure in relation to recent macroeconomic events.
• Metrics on leveraged positions and liquidation volumes with improved granularity to better understand the timing and impact of forced selling episodes.
• Developments in global geopolitical or economic conditions that might compound or mitigate risk-off sentiment affecting cryptocurrencies.

Bitcoin’s recent price drop illustrates the complex and intertwined nature of macroeconomic policy shifts and crypto market mechanics. While the BoJ’s policy move and subsequent leveraged liquidations are confirmed contributors, significant uncertainties remain about causality and the durability of current market conditions. Ongoing monitoring of macro policy decisions, liquidity flows, and market structure will be essential to understand Bitcoin’s evolving price dynamics.

Source: https://beincrypto.com/bitcoin-price-crash-reason-analysis/. This article is based on verified research material available at the time of writing. Where information is limited or unavailable, this is stated explicitly.