2 reasons why Bitcoin and other crypto just crashed

There was a sea of ​​red in the crypto industry as the Bitcoin price briefly dropped below $100,000 and the crypto fear and greed index moved from 88 to 69, the extreme greed zone. So why did crypto crash this week?

Bitcoin (BTC), the largest cryptocurrency, traded at $102,300 on December 19, while Ethereum (ETH) fell to $3,600. Some of the biggest laggards were cryptocurrencies like Cosmis, Floki, THORChain, Curve DAO Token, and Fantom.

Crypto crashed due to Fed decision

The most important reason for the crypto crash is the Federal Reserve decision. The bank decided to cut interest rates by 0.25%, as widely expected. This cut brings this year’s cumulative cuts to 1%.

However, the Fed stated that it was focused on controlling inflation and signaled that it would implement only two additional cuts in 2025. Officials expect inflation to remain persistently high and reach the 2 percent target only in 2026 or 2027.

The Fed’s hawkish tone led to declines in cryptocurrencies and other risk assets. US stock markets fell, with the Dow Jones and Nasdaq 100 indices losing more than 2%. U.S. Treasury yields rose to multi-month highs; The 10-year yield increased to 4.557% and the 30-year yield increased to 4.7%. Meanwhile, the US dollar index rose to its highest level in two years.

Mean reversal and distribution

Crypto is also down due to profit taking, panic, mean reversion and Wyckoff Method distribution.

Historically, crypto investors take profits when Bitcoin and other tokens rise too much. This can be explained by profit taking, mean reversion and the Wyckoff Method.

Mean reversion is when an asset in an uptrend declines to approach its historical averages. For example, as shown below, Solana remains approximately 20% above the 200-day moving average. Therefore, a decline may occur to approach this level.

Solana price chart | Source: crypto.news

The Wyckoff Method identifies the basic stages in an asset’s life cycle: accumulation, price increase, distribution, and price reduction. The recent rise in crypto was part of a price increase phase; A continued decline may indicate either a distribution phase or the beginning of a price reduction.

Will crypto prices bounce back?

Cryptocurrency prices often mirror Bitcoin’s movements. As mentioned earlier, Bitcoin’s cup and hand pattern indicates the potential for a rise to $122,000 in the near term. If such a situation occurs, a rally in altcoins could be triggered as investors benefit from the decline.

However, the immediate aftermath of a decline can lead to a “dead cat bounce”, where an asset that has experienced a significant decline temporarily recovers before resuming its downtrend.