Why Did The Crypto Market Plunge Overnight?

Why did the crypto market suddenly crash and billions of dollars were wiped out in just a few hours, and what does this mean for Bitcoin and altcoin investors moving forward?

Crypto markets are in free fall

In the last two days, the crypto market hit a speed bump and suffered a sudden crash that reduced its total value by billions of dollars. According to CoinGecko, the global crypto market cap has fallen by approximately 8.7% in the last 24 hours, reaching $3.52 trillion.

Global crypto market cap snapshot | Source: CoinGecko

Bitcoin (BTC) has weathered the storm relatively well, trading down just over 2% at $95,800 as of December 10, but the same cannot be said for most altcoins.

BTC 6-month price chart | Source: crypto.news

Ethereum (ETH) is down nearly 6%, settling at $3,580 as of this writing. Ripple (XRP), on the other hand, fell much sharper, falling 12.5% ​​to $2.09, increasing its weekly losses to approximately 17%. Solana (SOL), one of the industry’s top blockchain platforms, was also down 6% at $210.

The carnage wasn’t limited to major altcoins. The real bloodbath occurred in the meme coin segment, with Solana-based meme coins in the Pump.fun ecosystem dropping by almost 25%.

Tokens such as Peanut the Squirrel (PNUT), Goatseus Maximus (GOAT), and Just a Chill Guy (CHILLGUY) recorded losses ranging from 20% to 25%. Even more established Solana meme coins like Dogwifhat (WIF) and Bonk (BONK) traded down 20% and 18% to $2.74 and $0.00003475 respectively.

Beyond the meme coin turmoil, Bitcoin sidechains and gaming tokens were among the hardest hit. Collectively, these sidechains are down 24%, with Stacks (STX) down 16% to $2.07, and Core (CORE) down 20% to $1.12.

Gaming tokens, a niche closely tied to the metaverse and blockchain-based win-win economies, have also experienced sharp declines. Gala (GALA) is trading at $0.04342, down nearly 21%, while Sandbox (SAND) and Decentraland (MANA) are down 19% and 18%, respectively.

Now the question is: What caused this sudden market turmoil? And more importantly, where does the market go from here? Let’s examine how technical and fundamental indicators are shaping up for Bitcoin and altcoins.

Solving flash crash: What went wrong?

According to a detailed analysis shared by an algorithmic trader, the events that led to the Dec. 9 flash crash unfolded in stages, driven by a mix of weaknesses in the market structure, high leverage and liquidity issues.

Today’s collapse resulted in the largest liquidation since 2021. I would like to present a microstructural view of this entire situation. As always, this topic is full of information, graphs and commentary.

Retweet if you liked the analysis. pic.twitter.com/uCbZmPFbc5

— ltrd (@ltrd_) December 10, 2024

The sell-off began with aggressive selling at Coinbase, where investors began unloading their holdings about an hour before the big crash. This persistent selling pressure gradually pushed Bitcoin’s price into unstable territory, setting the stage for what is known as the liquidation phase.

When prices fall below certain thresholds, overleveraged positions financed with borrowed capital are forcibly closed by exchanges. This creates a domino effect as each liquidation creates more downward pressure and triggers more liquidations in a self-reinforcing cycle.

One of the indicators that the market was overheating before the crash was seen in the Funding Fee, which reflects the cost of maintaining long or short positions in perpetual futures contracts.

Rising funding rates generally indicate an intense uptrend, and many traders are betting on price increases. When the market turns against them, overleveraged positions quickly unravel, resulting in liquidations on an unprecedented scale.

To put this in perspective, more than $1.64 billion in futures contracts were liquidated in just 24 hours, according to CoinGlass data. Of this, $1.46 billion consisted of long positions (traders betting on price increases), while only $174 million consisted of short positions.

Liquidation heatmap of the last 24 hours | Source: CoinGlass

This imbalance clearly reflects how unbalanced the market has become, with the majority of participants caught on the wrong side of the trade.

The situation was further aggravated by poor liquidity conditions, especially in smaller altcoins. Cryptocurrencies like XRP, which have large market caps comparable to large companies, still suffer from relatively low liquidity.

This means that even a few large sell orders can have huge impacts on prices. According to the trader, “something definitely weird happened” when a series of large sell orders hit XRP, leading to a 5% drop in its price within minutes.

Another important aspect of the crash was the role of market makers, who provided liquidity by constantly buying and selling assets.

When such a large selling wave occurs, market makers are forced to hedge their positions, which can amplify price movements across multiple exchanges.

For perpetual swaps (a type of derivative), this hedging process triggers stop losses and additional liquidations, making the impact much sharper in a short period of time.

The big picture amid market chaos

Although the flash crash on December 9th momentarily interrupted a remarkable bull run, it is critical to zoom out and examine the broader picture to understand what is going on in the market.

First, the macroeconomic backdrop continues to play an influential role. The US dollar faced a steady depreciation in purchasing power.

As noted in the Kobeissi Letter, both gold and Bitcoin are often touted as hedges against fiat currency depreciation and are in a “persistent bull market when pegged to the US dollar,” making Bitcoin more widely accepted as a store of value. It reflects what has been done.

Both gold and #Bitcoin We are in a perpetual bull market when the index forms against the US Dollar.

In other words, the US Dollar is constantly in a bear market.

It appears that both gold and Bitcoin are pricing in a further deterioration in the purchasing power of the US Dollar. pic.twitter.com/7KhW7zxXlN

— Kobeissi Letter (@KobeissiLetter) December 9, 2024

As inflationary pressures continue and fiscal policies rely heavily on debt financing, assets such as Bitcoin are effectively pricing in the dollar’s continued loss of strength.

Adding fuel to the crypto narrative is the unprecedented growth of institutional adoption. The spot Bitcoin ETF, trading under the ticker IBIT, broke records by surpassing $50 billion in assets under management in just 228 days. For context, it took more than five years for the gold ETF (GLD) to reach the same milestone.

Crypto is a movement:

Bitcoin ETF, $IBITIts assets under management have officially surpassed $50 BILLION for the first time.

It took only 228 days to reach this threshold; This was 5X faster than any other ETF in history.

To put this into perspective, for gold… pic.twitter.com/r70uSDHGTv

— Kobeissi Letter (@KobeissiLetter) December 9, 2024

This institutional tailwind, combined with the 32% surge in the Bitcoin price last month to historic levels of $100,000, has injected an additional $1.4 trillion into the broader crypto market, lending further legitimacy to the strong health of the crypto market.

Meanwhile, the CME FedWatch Tool currently shows the probability of a 25 basis point (bps) rate cut at the December 18 Fed meeting at 86%, down from 64% just a month ago.

Interest rate cuts often reduce the cost of borrowing, making risky assets like crypto more attractive. Moreover, low interest rates also weaken the dollar, strengthening Bitcoin’s bullish case as a hedge against devaluation.

If the Fed does indeed proceed with another rate cut, it could further support liquidity in markets and create a favorable environment for crypto assets.

However, while Bitcoin remains relatively stable, the rest of the market remains fragmented; overleverage and underdeveloped infrastructure still pose risks.

What awaits Bitcoin and altcoins?

As the dust settles from the latest shakeup in the crypto market, the big question is: What’s next for Bitcoin and altcoins?

Starting from Bitcoin, the current sentiment suggests that the journey to higher levels is not over yet. Analysts like Doctor Profit argue that the recent horizontal consolidation is just a pause and Bitcoin price could possibly move towards targets between $125,000 and $135,000.

The next big move after this sideways move I predicted last week is the breakout and targets 125-135k… this is where I expect the first 20-30% correction

I have told you many times that 100k is not the peak of this cycle, we will go much higher and surprise everyone.

— Doctor Profit 🇨🇭 (@DrProfitCrypto) December 9, 2024

Such bullish predictions are based on Bitcoin’s history of cyclical price movements, which often see sharp corrections and consolidations before resuming its upward path. For example, Bitcoin’s 2020 bull run saw multiple corrections of 20%-30% before reaching its peak.

But not everyone agrees on the path forward. Crypto analyst Nik hints at the possibility of a multi-week correction if Bitcoin fails to maintain momentum above key levels like $104,000. He warns that a rejection below $99,000 could signal a prolonged cooling off period that could last until the new year.

Update:

If the correlation does not break this week, we will begin a multi-week correction for BTC in the next 3-4 days.

Initial signs could be pushing weekend highs to 104k and then moving back below 99k and accepting – if we see that, BTC will be baked until new… https://t.co/Wc3EcJEsuJ pic.twitter.com/yPTL998Svs

— Nik (@cointradernik) December 9, 2024

In this sense, a short-term decline will not necessarily negate the broader bullish narrative but could provide a healthy respite for the market.

Turning to altcoins, the outlook looks even more interesting. Michaël van de Poppe suggests that altcoins are on the verge of exiting the longest bear market. With the weakening US dollar and increased liquidity expectations, the stage appears set for a massive altcoin rally, according to Van de Poppe.

At this point, we shouldn’t be peaking with the markets any time soon.

The main reason for this is that we are about to exit the longest-running period. #Altcoin We are about to see a weak Dollar + liquidity added to the bear market.

I think we will go much higher.

— Michaël van de Poppe (@CryptoMichNL) December 10, 2024

Poppe’s optimism was echoed by Kaizen, which drew parallels with December 2020, when a 30% decline in altcoins preceded a three-month rally that delivered gains in excess of 400%. The recent 25% decline in altcoins, while painful, could herald similarly explosive growth.

However, it is important to temper optimism with caution; The inherent volatility of the crypto market means sentiment can change overnight, as seen in the recent flash crash. Therefore, trade wisely and never invest more than you can afford to lose.

Disclosure: This article does not constitute investment advice. The content and materials on this page are for educational purposes only.