Extreme fear took once again has taken hold of the crypto market following November’s all-time high.
Greedy times are over…for now
The Bitcoin Fear & Greed Index is an indicator that measures the sentiment around the cryptocurrency market. Although its predictive abilities can be called into question, it generally describes the emotional state of the market quite well. That was the case in early November when Bitcoin clocked a new all-time high just below $100,000 AUD. With the market being at almost maximum exuberance, so was the Fear & Greed Index, which back then traded at almost maximum levels of Extreme Greed.
The tables have turned, though. Following a sharp correction, Bitcoin is currently trading below the $70,000 AUD mark, and market sentiment has done a 180 to Extreme Fear. This marks the lowest levels on the Index since the May correction, which saw Bitcoin retrace all the way down to $40,000 AUD, with the market being fearful for several weeks.
What caused the crypto price correction?
It’s not easy to put your finger on what exactly drove Bitcoin’s recent correction. Rather, a number of factors may be at play.
First, Bitcoin may have entered a new trading range after the currency ran back from its summer low to an all-time high in the space of a little over two months. While hindsight is 20/20, it’s easy to see that a more than 100% price increase in an asset as big as Bitcoin cannot come without some sort of correction in the run-up.
Another significant reason seems to be a gloomy picture in equities, which have felt the weight of surging inflation in the United States. Although higher inflation was always on the cards, the Federal Reserve recently had to admit that it may not have the situation as much under control as it would like to. With the consumer price index coming in between 6% and 7% year-on-year in October and November, many expect the Fed to tighten its monetary policy and raise interest rates sooner rather than later. Bitcoin as a risk asset would stand to feel the pain more than other assets, and markets are seemingly pricing this possibility in.
Yet another factor contributing to a less-than-rosy macro outlook is a bubbling real estate crisis in China that saw Evergrande, a Chinese real estate giant, default on its debt last week. While China has banned Bitcoin too often to cause more than a temporary dent in markets, this crisis could impact assets far beyond crypto.
Lastly, a new Covid variant seems to have spooked investors, who anticipate possible new travel restrictions and lockdowns as a consequence. The March 2020 meltdown saw Bitcoin tumble down to under $5,000 AUD, and investors could feel a bit of PTSD considering the questionable impact of the new virus news on the markets.
All in all, Bitcoin investors do have plenty to be fearful about but should also not forget that a massive price recovery followed the last Extreme Fear period. Some may just decide to “buy the blood” and wait out the bad times.