The final day of 2024 witnessed a sharp and sudden drop in Bitcoin's price, briefly falling to $92,000. Over the past 24 hours, this volatility led to a total of $277 million in liquidations across the market. Long positions accounted for $185 million of these liquidations, while short positions made up $92.16 million.
This market turbulence coincided with the opening of the U.S. stock market, where cryptocurrency-related stocks and the so-called "Magnificent Seven" tech giants all experienced declines. The Dow Jones Industrial Average fell by 1.04%, the S&P 500 dropped 1.13%, and the Nasdaq Composite Index decreased by 1.33%.
Since entering the typical Christmas rally period in late December, Bitcoin has experienced multiple short-term sharp declines. This article explores the key market dynamics contributing to this period of heightened volatility.
A Stronger Dollar and Its Market Impact
According to data from Bank of America, U.S. equities saw approximately $35 billion in outflows over the past week. This marks the highest weekly outflow since December 2022. Additionally, trading desk estimates from Goldman Sachs suggested that U.S. pension funds were poised to sell $21 billion in U.S. equities and purchase an equivalent amount of bonds by the end of December.
The yield on the 10-year U.S. Treasury note rose nearly 1% last Friday, climbing to 4.629%—a level close to its seven-month high. This created a risk of further intense selling pressure in the stock market. Wall Street analysts noted that in the absence of major news, significant data releases, and during a period of light trading, the 10-year Treasury yield, often considered the anchor for asset pricing, would exert a strong influence on equities. Higher yields typically translate to greater downward pressure on stock prices.
A stronger U.S. dollar tends to suppress global currencies and assets, including Bitcoin. When the dollar strengthens, dollar-denominated assets become more attractive relative to cryptocurrencies. Investors often show a preference for traditional investments like U.S. Treasuries or stocks, which are perceived to offer returns in a robust dollar environment. This shift, combined with decreased liquidity and investors taking profits at year-end, significantly reduces the likelihood of a sustained cryptocurrency rally.
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Net Outflows from Bitcoin Spot ETFs
The flow of funds into Bitcoin spot ETFs has shifted. After a period of net inflows driven by the so-called "Trump rally," these funds have recently experienced net outflows. Last week saw a cumulative net outflow of $377.6 million, and outflows continued on the final day of the year. On December 27th, Fidelity's FBTC fund alone experienced a net outflow of $208 million, setting a record for its highest single-day outflow ever.
Options Expiry and End-of-Quarter Volatility Selling
On December 17th, trading firm QCP Capital noted that the options market was sending cautious signals. Despite spot prices continuously hitting new highs, the market for derivatives showed a persistent skew—investors were favoring put options over call options. This suggested a market more interested in hedging against risk than in aggressively chasing further price appreciation.
A major event occurred on December 28th, when nearly $20 billion worth of Bitcoin and Ethereum options were set to expire. This represented almost half of the total open interest on the Deribit exchange. Coinciding with this expiry, Bitcoin's price dropped from $97,000 to $94,000. QCP characterized this as a classic case of end-of-quarter volatility selling, particularly given that spot prices remained volatile and options sellers were actively closing out their positions.
Adam, an analyst at Greeks.live, commented on social media about the widening differences in skew across various option expiries. He noted that since the bull run began late in the year, the skew for different terms had been closely aligned, hovering around 5% with minimal divergence. However, as the market entered a corrective phase, these differences began to amplify, with short-term skew falling more significantly. This data indicates a clear cooling of market fervor and a reduction in the optimistic sentiment options traders had previously held for January.
Declining Stablecoin Minting and USDT Concerns
The month of December saw a significant decline in the minting of new stablecoins. A notable event was Tether minting 1 billion USDT on the Ethereum network on the 13th. Throughout the entire month, the minting volume for USDC was a mere 200 million. For context, since November 6th, Tether had minted a massive 21 billion USDT on the Ethereum and Tron blockchains.
A new factor emerged as the European Union's Markets in Crypto-Assets (MiCA) regulation came into effect. Tether's USDT has not yet received compliance certification under this new regulatory framework, raising concerns about its future in the EU market. MiCA imposes strict requirements on stablecoin issuers, including demands for robust capital reserves and liquidity. Major stablecoins like Tether face potential restrictions and could be forced to exit the EU market. Some exchanges in the region have already begun taking proactive measures; for instance, Coinbase Europe has delisted Tether and other stablecoins.
Despite these regulatory headwinds, Tether's enormous market capitalization and global adoption make an immediate financial crisis unlikely. Tether's CEO, Paolo Ardoino, took to social media to state, "Don't believe the FUD. Competitors are just eager to make you believe things that aren't true. USDT is safe."
It is important to note that Tether itself has not encountered any financial difficulties or been found to have engaged in unlawful activities. The company has indicated a focus on supporting new stablecoin initiatives, such as launching MiCA-compliant stablecoins like EURQ and USDQ. However, given the history of stablecoin failures in previous market cycles, short-term fear, uncertainty, and doubt (FUD) surrounding USDT can still negatively impact overall market confidence.
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Frequently Asked Questions
What caused Bitcoin's sharp drop at the end of 2024?
The drop was driven by a combination of factors including a strengthening U.S. dollar, significant net outflows from Bitcoin spot ETFs, the expiry of a large volume of options contracts, and concerns surrounding stablecoin regulation in Europe. These elements collectively created a period of heightened selling pressure and volatility.
How does the strength of the U.S. dollar affect Bitcoin's price?
A stronger dollar makes dollar-denominated traditional assets, like U.S. Treasury bonds, more attractive to investors. This can lead to capital flowing out of perceived riskier assets like cryptocurrencies and into these more traditional havens, thereby putting downward pressure on crypto prices.
What does "net outflow" from a Bitcoin ETF mean?
Net outflow occurs when the amount of money being withdrawn from an ETF exceeds the amount of new money being invested into it. This is a bearish signal, indicating that investors are reducing their exposure to Bitcoin through these regulated financial products.
What was the impact of the large options expiry?
The expiry of nearly $20 billion in options contracts led to what is known as "volatility selling." Traders and institutions closed out their positions ahead of expiry, which often involves selling underlying assets or related derivatives, contributing to increased market volatility and price declines.
Why are stablecoins like USDT important for the crypto market?
Stablecoins provide essential liquidity and serve as the primary on-ramp and off-ramp for traders moving between cryptocurrencies and traditional fiat currencies. Any regulatory uncertainty or loss of confidence in a major stablecoin can cause widespread concern and risk aversion across the entire digital asset market.
Should investors be concerned about the MiCA regulations?
While new regulations introduce uncertainty, they are ultimately aimed at creating a safer and more standardized market environment. For long-term investors, clear regulations can be a positive development that attracts institutional capital, though they may cause short-term market adjustments as the industry adapts.