What happened
The cryptocurrency market is crashing on Tuesday with major cryptocurrencies like Bitcoin (BTC 0.98%), Ethereum (ETH 0.64%), and Dogecoin (DOGE +3.68%) all dropping high-single digits. A traditionally slow week of trading could be at fault, so investors will want to watch momentum once people return to work in the new year.
As of 2:05 p.m. ET, Bitcoin was down as much as 8.1% in the last 24 hours and is currently down 7.4%. Ethereum had lost 8.3% of its value at one point and is now off 7.3%. Dogecoin is having the worst day of these three, and was down 9.7% at one point and is down 8.7% right now.
Image source: Getty Images.
So what
The broad crypto market is moving lower today and none of these cryptocurrencies have been spared. Sometimes the week between Christmas and New Year's Day can be slow for the market and lead to wild swings. I think that's at least partially responsible for today's move, given the natural volatility in cryptocurrencies.
Drops in cryptocurrencies can also be exacerbated by rapid selling from investors having to liquidate positions. When a broker or exchange sees that someone who has a leveraged position (bought in part with borrowed money) is taking losses, they can force liquidation to make sure the exchange or broker doesn't lose money. According to coinglass.com, $374 million in long (betting the cryptocurrency will go up) cryptocurrency positions was liquidated yesterday, the highest level since December 2 and 3 when $636 million and $1.58 billion, respectively, were liquidated. You can see below that values crashed on those days as well.
Bitcoin Price data by YCharts
There could also be downward pressure on major cryptocurrencies that are seen as a hedge to inflation after the Federal Reserve said it would reduce its pace of bond buying next year and let interest rates rise. Inflation has been a huge concern for many crypto investors, and with the Federal Reserve now taking it seriously there could be a reason for some investors to sell Bitcoin.
Now what
Volatility is something all cryptocurrency investors need to get used to and today is one of the days the market has turned against most cryptocurrencies. But there isn't a fundamental reason for the decline, like a market failure or hack, so I don't see a reason to change your investment thesis today.
What's worth watching long term is the leverage in the crypto market and how it can exacerbate gains and losses in trading. Investors are now using both leverage and futures, which are leveraged investment instruments, to buy and short Bitcoin and other cryptocurrencies, which could make the market even more volatile. If you're not prepared for these big moves, they can be a shock to the system.
