Bitcoin Crash On Feb. 5 Was Historic: The Numbers Behind The Selloff

Overview

On February 5, Bitcoin experienced a significant downturn, marking one of the largest daily declines in its history. The cryptocurrency plummeted over 15%, approximately $10,800, leading to widespread impacts across various trading venues, including derivatives and the US Bitcoin ETF market. This dramatic selloff was characterized by a confluence of stress indicators that signaled potential capitulation in the market.

What Happened

Bitcoin’s sharp decline on February 5 was not only notable for its percentage drop but also for the simultaneous emergence of multiple stress signals. Implied volatility surged, trading volumes spiked, and momentum indicators fell to levels typically associated with forced selling rather than voluntary risk management.

Real Vision’s Jamie Coutts described the day’s trading as a “capitulation watch,” emphasizing the unusual clustering of metrics that are rarely observed together. He highlighted that Bitcoin’s implied volatility, as measured by the BVIV, reached significant levels, nearing the peak seen during the FTX collapse. In addition, Coinbase recorded one of its largest trading days by USD value, with substantial volumes transacted.

Coutts pointed out that the daily Relative Strength Index (RSI) dropped to levels comparable to the lows seen during the COVID crash in March 2020. He noted the occurrence of margin calls and potential forced liquidations, suggesting that the market was exhibiting characteristics of a capitulation event. However, he cautioned that capitulation could unfold over an extended period rather than being confined to a single trading day.

Macro trader Alex Krüger acknowledged the extreme market conditions, noting that the current positioning and pricing distortions are often indicative of turning points. He refrained from providing a specific price target but recognized the presence of significant short positions that could trigger a short squeeze, potentially affecting Bitcoin’s price trajectory in the near future.

Galaxy’s Alex Thorn remarked on the historical oversold conditions of Bitcoin, stating that the current RSI levels were among the lowest observed since the Three Arrows Capital collapse in June 2022. He characterized the situation as one of the most oversold events in Bitcoin’s history, alongside notable past occurrences in November 2018 and June 2022.

The US spot Bitcoin ETF market did not mitigate the volatility; instead, it intensified trading activity. Bloomberg Intelligence reported that BlackRock’s iShares Bitcoin Trust shattered its daily volume record, with substantial trading activity noted. This increase in trading volume was accompanied by a significant drop in the fund’s price, marking one of its worst daily performances since its inception.

Positioning data indicated a complex ETF ecosystem, with net short exposure in short BTC ETFs nearing previous highs. In contrast, 2x leveraged long BTC ETFs held significant amounts of Bitcoin, reflecting a divergence in market sentiment.

From author

The events of February 5 illustrate the inherent volatility of the cryptocurrency market and the potential for rapid shifts in sentiment. The combination of high implied volatility, extreme trading volumes, and oversold conditions creates an environment ripe for significant price movements. Observers of the market are closely monitoring these developments, as they may signal crucial turning points or prolonged periods of instability.

Impact on the crypto market

• Bitcoin’s steep decline highlighted the vulnerability of the cryptocurrency market to rapid selloffs.
• Increased implied volatility indicates heightened uncertainty among traders and investors.
• The record trading volumes in Bitcoin ETFs reflect intense market activity and potential investor panic.
• The presence of significant short positions raises the possibility of a short squeeze, which could impact future price movements.
• Historical oversold conditions suggest that the market may be approaching a critical juncture, with potential for both recovery and further declines.
• The current state of the Bitcoin market may influence broader sentiment in the cryptocurrency space, impacting other digital assets.