Analysis of the drop of Bitcoin on Dec 4th, 2021
Bitcoin Crash Between midnight on Friday, December 13 and morning on Saturday, December 14, the price of bitcoin dropped by more than 20%. It dropped from $53670 on Friday afternoon to $45870 the following day. The drop is primarily due to two factors: Option trading and interest rate risk
Last week, Fed President Jerome Powell stated that the Fed was planning to expedite tapering, implying that money market supply will decline and interest rates will rise quicker than projected. As interest rates rise, risk-free assets will become more appealing to investors, while riskier assets such as bitcoin will become less appealing, lowering the price.
Furthermore, when we look at the stock market, we can see that the tapering only caused the Nasdaq to decline roughly 2.6% that week. Because the crypto market’s movements are typically larger than those of the stock market, this confirms our conjecture.
Option trading is the second reason.
On Friday, almost $2.5 billion in options were liquidated. Compared to only $160 million the day before, according to Coinglass. The liquidation of call options, which are long positions on bitcoin prices, brought in $2.1 billion.
Many of the liquidations include leveraged investments, worsening the problem. The liquidation of call options would induce panic in the market. Causing more people to sell their long positions. And causing the price decrease to accelerate, which triggers more call options to be liquidated.
When examining the price drop, it is worth noting that the volatility of bitcoin should be taken into account. To be more exact, if we assume bitcoin price returns follow a normal distribution. As a result, we can calculate the likelihood of such a big decline occurring.
Bitcoin’s 30-day moving standard deviation is 0.036033195, with a mean of -0.006747966. If we calculate the probability of a day with a 10% loss. We find that there is a 0.5% chance that such a big decrease will occur. Even considering bitcoin’s tremendous volatility, this is still a significant loss.
