A crypto crash is underway, affecting millions of investors who are betting on a continuation of the bull run. The market capitalization of all coins has dropped from over $4 trillion last week to $3.8 trillion today, indicating a loss of over $200 billion in assets.
Bitcoin price has crashed below $117,000, while some of the top laggards were altcoins like Pump, Pudgy Penguins, Dogwifhat, Jupiter, Virtuals Protocol, and Fartcoin. This is notable since these altcoins were among the best performers during the crypto bull run.
Crypto crash is happening because of profit-taking
One of the primary reasons for the ongoing crypto crash is known as profit-taking. It is a situation where investors who have benefited from the recent rally start to book profits.
This profit-taking is justified as many cryptocurrencies surged by double digits recently. For example, at its highest point, Bitcoin was up by over 65% from its lowest point in April.
Similarly, Ethereum price was up by over 175% from its lowest level in April. Other altcoins like Pudgy Penguins, Fartcoin, and Virtuals Protocol were up by triple digits.
Bitcoin and altcoins crash because of mean reversion
The other notable reason for the ongoing crypto crash is known as mean reversion. This is a common concept that compares an asset’s price to its moving averages.
The theory suggests that an asset tends to remain close to its moving averages over time. And it tends to return to these averages after diverging from them over time.
Bitcoin and most altcoins separated from their moving averages during the recent surge. For example, while Bitcoin price as dropped to $115,000, it remains much higher than the 100-day moving average of $106,200. It is also higher than the 200-day average of $99,100.
The same is true for other altcoins. For example, XRP price is trading at $3.08, much higher than the 200-day moving average at $2.2672. Ethereum price of $3,636, much higher than the 200 EMA at $2,615.
Trade jitters remain
The ongoing crypto crash is occurring due to the ongoing trade volatility as the August 1 deadline approaches. While the US has already reached a deal with Japan and the Philippines, it is yet to do so with other countries like those in the European Union and South Korea.
Trump has said that the US will impose sweeping tariffs starting from August 1 of this year. If this happens, there is a likelihood that crypto and stock prices will pullback.
Federal Reserve interest rate decision
The crypto crash is unfolding as traders remain concerned about the Federal Reserve, which is set to meet next week. Most crypto traders would want the bank to cut interest rates in this meeting, but officials have hinted that this will not happen.
The bank is concerned about the state of the economy as data shows that inflation is ticking upwards. Analysts expect the first cut to occur either in September or at the October meeting.
Will crypto prices rebound?
On the positive side, there are potential catalysts that may push crypto prices higher in the coming months. First, Bitcoin is forming a bullish flag pattern, indicating further gains in the coming weeks.
Second, data shows that the relentless buying of Bitcoin and Ethereum ETFs has continued this week. This is a sign that institutional investors are accumulating the token.
Furthermore, the Federal Reserve is expected to be more aggressive in its interest rate cuts next year when Trump replaces Jerome Powell.
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