Thoughts on the August market dump

On 2023 August 17 we had a flash crash in the crypto market. In this post I will unpack what caused it, why I was not surprised by it, and what I am expecting from the near future.

The Numbers

To be able to understand what we are dealing with here, let’s see what the damage was. According to Coinglass, yesterday there was a liquidation in the magnitude of almost $1 billion. For comparison, this was a bigger single day wipe-out than the one we saw when FTX blew up.

In terms of single day percentage, the range was -16% on Bitget’s Perpetual Futures platform. This essentially put the price back to where it was before BlackRock announced that they are filing for a Bitcoin Spot ETF with the SEC. In terms of time, 2 months of bullish incline was punched back to ground zero.

The Trigger

Ever since BlackRock’s ETF application and the ETF frenzy that followed, the market was taking the SEC approval for granted, this pushed up the price of BTC from the 25K area to 31K. Since then a lot of news and speculation was coming to light which put the entire idea of an approval to question, but that didn’t really seem to bother the investors, the price kept itself up around 30K.

On 2023 August 17, the price of BTC was floating between 28K-29K as a result of a gradual bleeding, no fresh investment money flowing into the market. The official FED Meeting minutes revealed that there is a possibility of another rate hike down the road, which the markets obviously didn’t like. After this, all that was needed for a crash was a headline which said SpaceX sold all its BTC holdings. In reality, what happened was that SpaceX wrote down the losses in their books that were represented by BTC valuation. In other words, they considered the price difference as a loss. This is a way of removing some bad debt from accounting if a company doesn’t want to keep them there anymore. As soon as BTC price recovers, they will book an excess profit of the proportional magnitude.

Nonetheless, the headline was potent enough to send the price of BTC south, strongly enough so that it would pierce through some strong levels, taking out 28K, then 27K, then it was a cascading waterfall down to almost 24K, thanks to all the leveraged longs that were liquidated along the way.

Boredom in the crypto market is one of the greatest enemies out there. Crypto traders are not the Warren Buffet type of patient investors. If prices are fluctuating in a few percentage rate over weeks, they get bored, and start to get into leverage trading. Leverage trading means elevated chances of liquidations if the markets make a bigger move.

Technical writings on the wall

Was I expecting this drop? To a certain extent, I was. I use a special pigmoney indicator cocktail usually works quite well for forecasting major moves.

Ingredients: Bullish/bearish divergence indicator on RSI/PA + Bollinger Band outreach + Bollinger Band squeeze

I have 2 technical indicators which I consider to be my favourites. Divergences and Bollinger Bands.

Divergences occur when the price action moves in the opposite direction of the RSI trend. A bullish divergence can be witnessed when the price moves downwards, but RSI inclines, and a bearish divergence appears when the price of an asset moves upwards, but the RSI declines.

It is easy to see that in the chart below, we had a pretty clear example of these bearish divergences signaling that there is a drop coming.

As a confirmation, the price has been reaching out of the Bollinger Bands every time before the decline was imminent.

As a secondary confirmation, there was a Bollinger Band squeeze happening (yellow circle). This usually indicates that there is a violent move coming in either directions.

Expectations

I don’t have high hopes for the market to recover and reach the 30K levels anytime soon. To be bullish again, the markets would need a strong catalyst, something like the SEC approving all BTC Spot applications, or a similarly unexpected event that would prove the bears wrong.

Without such an event though, with low overall money supply and liquidity, prices will remain highly volatile and will liquidate more and more traders, until they run out of money to lose.

My assessment is that we are looking into the final flush of the retailers and weak hands. Once both bears and bulls get sufficiently defeated, we will be in a position to start the new bull run. When will that happen? My humble guess is that the rest of the year will be about pain. As soon as the interest rates are going to ease a little, new hope and new investor money will have the chance to enter the markets. So for now, I am in standby position, waiting to see how this drop plays out. I will start heavily accumulating BTC if it drops to the 20K area.