It was a sea of red in the crypto industry as Bitcoin price dropped below $100,000 briefly and the crypto fear and greed index moved from the extreme greed zone of 88 to 69. So, why did crypto crash this week?
Bitcoin (BTC), he largest cryptocurrency, was trading at $102,300 on Dec. 19, while Ethereum (ETH) dropped to $3,600. Some of the top laggards were coins like Cosmis, Floki, THORChain, Curve DAO Token, and Fantom.
Crypto crashed because of the Fed decision
The most important reason why the crypto crash happened is the Federal Reserve decision. The bank decided to cut interest rates by 0.25% as was widely expected. That cut brought the cumulative cuts this year to 1%.
However, the Fed signaled that it would only implement two additional cuts in 2025, citing its focus on controlling inflation. Officials expect inflation to remain persistently high, reaching the 2% target only in 2026 or 2027.
The hawkish tone from the Fed led to declines in cryptocurrencies and other risk assets. U.S. equity markets plunged, with the Dow Jones and Nasdaq 100 indices falling over 2%. U.S. Treasury yields surged to multi-month highs, with the 10-year yield rising to 4.557% and the 30-year yield climbing to 4.7%. Meanwhile, the U.S. dollar index soared to a two-year high.
Mean reversion and distribution
Crypto is also down because of profit-taking, panic, mean reversion, and the Wyckoff Method distribution.
Historically, crypto investors take profits when Bitcoin and other tokens rally too much. This profit-taking can be explained in terms of mean reversion and the Wyckoff Method.
Mean reversion is a situation where an asset in an uptrend falls so that it can move close to its historical averages. For example, as shown below, Solana remains about 20% above the 200-day moving average. As such, it may drop to get closer to that level.
The Wyckoff Method identifies key phases in an asset’s lifecycle: accumulation, markup, distribution, and markdown. The recent crypto surge was part of the markup phase, while the ongoing decline could signify either a distribution phase or the start of markdown.
Will crypto prices bounce back?
Cryptocurrency prices often mirror Bitcoin’s movements. As previously noted, Bitcoin’s cup-and-handle pattern indicates the potential for a rally to $122,000 in the near term. If this happens, it could trigger a recovery across altcoins as investors capitalize on the dip.
However, the immediate aftermath of a dip may lead to a “dead cat bounce,” where an asset experiencing a significant decline temporarily recovers before resuming its downtrend.