Bitcoin price has fallen below the critical support level of $60,000, reaching a low of $57,914. Since Tuesday, Bitcoin has seen an additional 7% drop, reinforcing the ongoing downtrend. Currently, the market sentiment is shifting sharply to the bearish side.
Is a May 2021-style Bitcoin crash coming?
Andrew Kang, co-founder of Mechanism Capital, created Significant concerns regarding the emerging pattern in the Bitcoin market, reminiscent of the conditions that led to the dramatic May 2021 crash. In a detailed analysis shared via X (formerly Twitter), Kang highlighted the overlooked criticality of the current market dynamics.
Kang stated: “Most market participants are not appreciating the significance of a potential loss in Bitcoin over the 4-month range. The closest parallel we can draw is with the May 2021 range, where we also came out of a parabolic rally in BTC and alts.”
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He noted the similarities in market conditions, particularly in terms of leveraged positions, which currently exceed $50 billion. “That number does not include Chicago Mercantile Exchange (CME), which is larger, but compounded by the fact that in this scenario we have ranged even more (18 weeks vs. 13), and we have not yet had extreme drawdowns, although we did have some in the mid-2020-2021 bull market,” Kang elaborated.
Kang also adjusted his projections for Bitcoin’s bottom, suggesting a steeper drop than previously anticipated: “It’s likely that my initial estimates of $50K were too conservative and we will see a more extreme reset to $40K.” He warned that such a pullback could significantly disrupt the market, requiring a few months of consolidation and a downtrend before any reversal to an uptrend could be conceivable.
In dialogue with Alex Krüger, a well-known macro and crypto analyst, the discussion explored the intricacies of open interest (OI) in the derivatives market, a crucial aspect for understanding market sentiment and directional biases. Krüger highlighted: “However, much of this OI is non-directional,” suggesting a more complex market behavior than simple long and short positions.
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Responding, Kang clarified the composition of OI, saying, “Each unit of OI is one long + one short. Even though there are basis shorts on the short leg, there is a directional long on the other end. So yes… less directional shorts.” The conversation further delved into whether derivatives traders are delta neutral, which affects market stability.
Krüger asked about market makers’ positions, and Kang replied: “I can assure you that there are not many market makers in OI who are criminally long delta neutral and short spot, paying financing/borrowing on both ends for a negative carry trade.”
What happened in May 2021?
This ongoing debate among experts reflects growing concern about the possibility of a repeat of the May 2021 crisis. During that period, Bitcoin’s price plummeted after peaking at around $64,000 in mid-April 2021. By the end of June, it had lost around 56% of its value. This crisis was precipitated by a combination of factors, including repressions in China, environmental concerns expressed by influential figures such as Tesla CEO Elon Muskand a resulting cascade of panic selling among retail and institutional investors.
In hindsight, the May 2021 recession was characterized by a rapid shift in investor sentiment, driven by external shocks and exacerbated by high levels of leverage in the market. Similar conditions could be forming today, according to Kang, with high leverage and long periods without significant price corrections suggesting the market may be on the verge of another severe recession.
At the time of writing, BTC was trading at $58,736.
Featured image created with DALL·E, chart from TradingView.com