Behind the Bitcoin Crash in August: Leverage Liquidation Leads to Long Pressure

Bitcoin experienced a major repricing from August 17th to August 18th, dropping by about 10% within a few hours between 4pm and 6pm Eastern Time. According to Coinbase's data, the price of Bitcoin dropped by 8.8% from the opening price on August 17th, reaching a low of $25,244. This drop caused BTCUSD to fall below the 200-day and 200-week moving averages. During and after this event, the open interest in the perpetual futures market decreased by about $2.75 billion, marking the largest Bitcoin deleveraging event since the collapse of FTX in early November 2022.

Many people have started to speculate on the reasons for this sudden BTC crash. Some believe that the reason for the drop in Bitcoin price is due to investors in the market having doubts about the future of cryptocurrencies, while others believe it is just a normal market adjustment. In this article, the veDAO Research Institute will interpret the reasons behind this and predict the market trend based on some data and analysis conclusions.

Reasons for BTC's Decline

Market Hotspot Events

James Butterfill, research director at CoinShares, shared his views on the reasons behind this crash on Twitter. He emphasized the market's adjustment expectations for the approval of a Bitcoin ETF by the U.S. Securities and Exchange Commission (SEC), indicating that it is expected not to be approved immediately; at the same time, he also expressed concerns about the economic downturn in China and the potential deflationary effects. In addition, the significant decrease in Bitcoin trading volume makes the market more susceptible to large trades. Historical data also shows that Bitcoin's low volatility usually precedes significant price movements.

Other news affecting BTC also includes a report from The Wall Street Journal on August 17th examining SpaceX's financial statements, pointing out that SpaceX has written down a total of $373 million worth of Bitcoin, which seems to have been sold. On the same day, the U.S. housing finance institution Freddie Mac released data showing that the average interest rate for 30-year fixed-rate mortgages in the U.S. rose to 7.09%, reaching the highest level since April 2002; this may indicate that a wider range of asset classes will also decline. Essentially, the price of Bitcoin is influenced by various global and market factors, not just these key events.

On-Chain Data Analysis

By observing some key on-chain indicators, it is not difficult to see that the true reason behind this crash comes from the derivatives market, especially the large-scale liquidation of leverage and long position liquidation, ultimately leading to long squeezing.

First, by observing the Bitcoin balance held by major exchanges, we can see that there was no significant inflow of funds into the exchanges. This means that on-chain holders did not return their Bitcoin to the exchanges for sale, so the selling pressure did not come from this side.

However, based on the chart of open interest, we can see a different situation. Open interest refers to the number of open positions (including long and short positions) on derivative exchanges. There was a significant decrease here, indicating that many traders have closed their positions. The positions closed were mostly long positions.

This event marked the highest long position liquidation we have seen this year, with 5,694 long positions liquidated on August 17th. The last time we saw such a high number was on November 9th last year, when this number was even slightly higher, and the price of Bitcoin dropped by 27%.

As shown in the following chart, in contrast, the number of closed short positions can be said to be negligible.

From these charts, we can conclude that long traders were forced to close their positions, forcing them to sell, leading to a chain reaction known as long squeezing.

Price Analysis

There are two macro scenarios for the short-term price trend, but both indicate the same short-term price trend. As shown in the chart, according to Elliott Wave, we can consider the situation since November 21st last year as a completed five-wave impulse stage. Therefore, we will either see a three-wave correction stage; or we will see a larger five-wave trend, but this will lead to Bitcoin entering the final bear market.

In the short term, it is expected to recover from the current level, most likely back to $28,000. This recovery is either the B wave in a bullish scenario (three-wave correction), or the 2 wave in a bearish scenario (five-wave impulse).

Next, it can be expected that the price will start to rise from the current level, from which we can further verify which scenario will be the main one. If the bullish trend is in play, then the price will move towards the 0.618 Fibonacci retracement level of $21,500. If the price falls below the 0.618 Fibonacci level, it may indicate that we are seeing the third wave in the five-wave impulse stage, and the final target of completing this pattern may be around the next most important support area of around $11,000.

Conclusion

Since August 17th, the entire BTC market has been in decline, but with the sharp drop occurring, a rebound will soon follow. However, due to the market structure implying the beginning of a downtrend, this rebound can only push the price up to a certain extent.

Historical data shows that August and September are usually not favorable for mainstream cryptocurrencies. Nevertheless, in the bull market phase before August, BTC still showed considerable resilience. Although history may be similar, there are still changes brought about by the market environment. Factors such as global policy environment, investor confidence, and the application of emerging technologies may all have a significant impact on the value of BTC. When analyzing the trend of Bitcoin, it is still necessary to continue to pay attention to these key factors in order to more accurately predict the future direction of the market.

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