Bitcoin is obviously in the middle of one of it's now infamous "corrections". As multiple people have pointed out here and other places, these are very typical in the trading patterns Bitcoin has developed over the last 10 years. But why do they happen? What triggers them? And why are they so violent?
First, we need to understand that there are patterns to markets. Go into any basic TA (technical analysis) handbook and you'll see all sorts of patterns that occur repeatedly on charts. M-patterns, W-patterns, cup-n-handles, bull flags, bear flags, support, resistance, triangles, channels, etc. These patterns tend to replay themselves over and over again, no matter the underlying asset. Because of this, traders can make educated guesses as to which way the market will go. They're not always right and they are constantly adjusted as the market changes, but if you pay attention and read them correctly, you can increase your odds dramatically of entering and exiting trades at times when the odds are in your favor.
One of the most widely used methods of measuring moves is the Fibonacci Sequence and its related Proportions. I won't go into the details (you can read about it here) but, in a nutshell, it's basically a mathematical formula that is repeated over and over in many different areas of nature, art, and of course, math (charts). For whatever reason, it tends to show up again and again in patterns and can be applied to trading.
So, what does this have to do with Bitcoin? Well, let's apply a real-world scenario.
Let's say you are a company that is onboarding wealthy clients and/or corporations/institutions into the Bitcoin market. We know they're out there. NYDIG, for example, was part of Michael Saylor's executive conference. That's one of the things they do. Anyway, let's say this company has a client that wants to buy $1B in Bitcoin. That's 20,000 BTC. How could they get that done in a bull market, while coins are being taken off the exchanges, without causing the price to go up another $10,000? If traders/exchanges see an order come in for 20,000 BTC, they're going to sell a little and move up, sell a little and move up, and so on. By the time this client gets all of its Bitcoin, the price may have risen $5k-$10k or more. What's worse, once that buying pressure is gone, the price could immediately drop again. Not the greatest service done for the client by the onboarding company.
So instead, how about this? These companies already have a supply of their own Bitcoin. They also have connections to exchanges and traders all over the place. What if they wait for the charts to hit a certain technical "selling" point (Fibonacci's again) and then they (and possibly some of their trader friends) hit the market with a big market order. (Remember, the market is at an all time high so this is still all profit) This immediately spikes the price down. That, in turn, causes others who were already looking at taking some profits to pull the trigger as well. I'm sure they were also monitoring leverage and saw that a spike down would also have a strong chance of triggering some liquidations; more selling. Now you've got a bunch of nervous people who FOMO'd in wondering what to do. So, you hit it with another big market order and the landslide begins.
Now, as the company onboarding your client, you start buying pieces on the way down. While people are panic selling, you are accumulating your 20,000 BTC for your client. In the meantime, you're frantically making phone calls to all your potential customers sitting on the fence telling them NOW is the time.
At the end of the day, the market finds a bottom (support) and you just sit back and accumulate for your customers. You may even buy yours back 20% below where you sold it. Done! New client happy. You happy. A few thousand people overleveraged rekt, and some people who probably shouldn't have been in the market to begin with, out and licking their wounds. In the meantime, you've now helped the market establish a major support level, given everyone the correction they've been craving, and you are popping champagne with your new client.
At least that's MY perspective.
Let me know what you think. Thanks for reading.
Per usual, these are my opinions. I'm not an investment advisor. Cryptocurrencies can and do go up and down and you could lose all your money.
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