Ethereum’s $2,000 Plunge: Is the Bullish Fire Still Burning?

• Ethereum (ETH) saw a sudden 14% price drop on January 3, 2024, causing concern and liquidation of $100 million in long contracts.
• Whales took advantage of the dip, buying substantial amounts of ETH, signaling confidence in a market rebound.

Ether (ETH), the second-largest cryptocurrency by market capitalization, faced a substantial 14% price correction on January 3, 2024. This sudden drop, from $2,380 to $2,050 in less than two hours, marked a significant downturn in the cryptocurrency’s recent bullish momentum. A level not seen since December 2023. This sudden correction raised concerns among traders and investors about the future trajectory of ETH’s price.

The sharp price drop triggered the liquidation of a substantial $100 million worth of ETH long future contracts. Leveraged traders essentially used these contracts as investments based on the expectation of rising cryptocurrency prices. The liquidations exacerbated the market turbulence and highlighted the vulnerability of leveraged traders in such an unstable climate.

Ether’s price volatility is currently causing traders and market watchers to struggle. This pullback represented the third failed attempt in the last month to break through the resistance level at $2,400. Moreover, Ether’s price fell below $2,150 for the third time in that same time frame. Due to these persistent setbacks, many doubt the durability of the bullish momentum that once defined cryptocurrency.

Swift Recovery and Possible Triggers

The price of $BTC plummeted ~10% in a short period as #Matrixport predicted in the latest research that the #SEC will reject Bitcoin Spot ETFs.#Coinglass data shows that a long order worth $14.26M was liquidated on #Huobi.https://t.co/MT0EgNW8ib pic.twitter.com/Es7X0Y5MAE

— Lookonchain (@lookonchain) January 3, 2024

Despite the significant price drop, Ether quickly rebounded to $2,230 on the same day. This quick recovery implies that the initial cause of the panic sales and liquidations may have become less potent. Some analysts blame the initial decline on a market analysis published on January 3, suggesting that a spot Bitcoin ETF might not be approved. The attention this analysis received resulted from Jihan Wu, one of the founders of Matrixport, who is well-known for his work in Bitmain’s ASIC miner division.

The price of $BTC plummeted ~10% in a short period as #Matrixport predicted in the latest research that the #SEC will reject Bitcoin Spot ETFs.#Coinglass data shows that a long order worth $14.26M was liquidated on #Huobi.https://t.co/MT0EgNW8ib pic.twitter.com/Es7X0Y5MAE

— Lookonchain (@lookonchain) January 3, 2024

Since the establishment of a Bitcoin ETF might have a big impact on the larger cryptocurrency market, investors are keeping a careful eye on the situation. According to Eric Balchunas, a senior ETF analyst at Bloomberg, the approval odds are still 90%.

New Research note from me today. We still believe 90% chance by Jan 10 for spot #Bitcoin ETF approvals. But if it comes earlier we are entering a window where a wave of approval orders for all the current applicants *COULD* occur pic.twitter.com/u6dBva1ytD

— James Seyffart (@JSeyff) November 8, 2023

This uncertainty has led to market reactions that swing excessively in both directions. This reflects excessive confidence in the January 10 deadline and difficulty differentiating between opinions and actual news.

Overbought Market and Leverage

Commercial litigator Joe Carlasare summarized the situation by stating that the market was overbought. This assessment implies that buyers used excessive leverage, making them easy pickings for whales and market makers. An examination of the ETH monthly futures annualized premium further supports this assessment, which should typically range between 5% and 10% in a healthy market. 

I know people are desperate for a narrative, but Bitcoin didn’t sell off because of some silly report about ETF denial.

It sold off because nothing goes straight up and it’s an easy grab for liquidity to do a long squeeze. In short, the market was overbought.

— Joe Carlasare (@JoeCarlasare) January 3, 2024

The data shows an increase in demand for leveraged ETH long positions, with the premium rising from 11% on December 18, 2023, to 27% on January 2, 2024. Buying holders found it expensive to maintain these positions for extended periods.

Ether monthly futures annualized futures premium. 

On August 17, 2023, Ether last suffered a similar significant loss in the futures markets when $170 million worth of long positions underwent liquidation. On that occasion, there was a 15% intraday correction, dropping the price from $1,800 to $1,530, which quickly rebounded to $1,680 within two hours. However, the medium-term price recovery did not hold, as Ether revisited the $1,530 bottom on September 11, 2023.