Cryptocurrencies experienced a massive plunge yesterday in the afternoon. Bitcoin dropped over 15% in less than 2 hours while Ethereum dropped around 20% during the same period. While most coins recovered somewhat later on, prices remained deep below levels from the beginning of a week. Given such a steep drop investors' began to wonder - is the bull market on cryptocurrencies over?
Why did cryptocurrencies plunge this week?
Start investing today or test a free demo
Open real account TRY DEMO Download mobile app Download mobile appIt is hard to find a clear answer for this question as it is usually the case with abrupt moves on the cryptocurrencies market. However, a point to note is that yesterday was the day when Bitcoin became a legal tender in El Salvador, the first country to make such a move in history. It is an unprecedented event but its impact on the cryptocurrency market may actually be limited. While Bitcoin will serve as a legal tender in El Salvador, US dollar will continue to do so as well. Authorities claimed that the move will allow citizens to send remittances in Bitcoin in order to avoid high transaction costs involved in USD money transfers. However, as Bitcoin is one of the first cryptocurrencies in the world, its efficiency when it comes to transferring money is poor and very often it is cheaper and faster to send transfers in fiat money.
Sell the fact?
The move to make Bitcoin a legal tender in El Salvador was announced at the end of June and Bitcoin has gained over 70% between the announcement and beginning of this week. Having said that, this week's drop may have been a sign of a "sell the fact" approach by investors. However, the rollout of Bitcoin as legal tender in El Salvador was troubled by technical glitches of the online wallet, what hints that adoption of cryptos as legal tenders may not be as smooth as one may have expected. While sell-off on the cryptocurrency market was halted yesterday and coins managed to recover part of their losses, another wave of selling arrived this morning. On one hand, it may be a reaction to broad deterioration in market sentiment (stocks plunging). However, it may also have been a reaction to an announcement from Coinbase, the largest cryptocurrency exchange in the United States. Coinbase said that it has been notified by the US SEC about a potential legal action against the company for its plans to launch a product that allows investors to gain interest on its cryptocurrency holdings.
Technical Analysis
In spite of the other arguments mentioned in the paragraph above, we think that the first one - "sell the fact" approach - best explains what's going on on the cryptocurrencies market. Having said that, an ongoing plunge may not necessarily lead to a long-term trend reversal as it could be just a brief correction. Note that cryptocurrencies experienced a similar steep drop in the past and it was not followed by a period of longer-lasting declines. Let's take a look at what the technical situation on major cryptocurrencies - BITCOIN, ETHEREUM and RIPPLE - tells us.
BITCOIN
Bitcoin has plunged around 19% from yesterday's daily high to daily low. However, taking a look at the bigger picture, we can see that this drop has barely exceeded 40% of the upward move started in July. After a positive price reaction to the 100-session EMA (blue line), Bitcoin started to recover and climbed back above the 38.2% retracement of the aforementioned upward move. A look at the chart at D1 interval also shows us that yesterday's plunge was nowhere near as steep as declines from April and May. Bitcoin is trading near the price zone ranging between 50% retracement of April-May drop and 23.6% retracement of recent upward impulse. This zone saw a few price reactions over the past month and climbing above would be seen as positive.
Source: xStation5
ETHEREUM
ETHEREUM halted recent upward move at the 88.6% retracement of the pullback launched in mid-May 2021. Price of this cryptocurrency reacted positively to the 55-session EMA yesterday in the $3,015 area. Note that this zone is additionally strengthened by the 50% retracement of the aforementioned upward move. Coin climbed above the 61.8% retracement later on, that served as the upper limit of a trading range from August ($3,330). Positive reaction to the important moving average as well as returning back above the $3,330 price zone can be seen as a positive technical development.
Source: xStation5
RIPPLE
A look at RIPPLE shows us that the price has reached a low at around 50% retracement of the recent upward move. Coin has later on recovered and now attempts to climb back above the price zone marked with the 38.2% retracement. Note that upward trendline can be found slightly above this zone and climbing above this technical hurdle would brighten near-term outlook for buyers.
Source: xStation5
The content of this report has been created by XTB S.A., with its registered office in Warsaw, at Prosta 67, 00-838 Warsaw, Poland, (KRS number 0000217580) and supervised by Polish Supervision Authority ( No. DDM-M-4021-57-1/2005). This material is a marketing communication within the meaning of Art. 24 (3) of Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (MiFID II). Marketing communication is not an investment recommendation or information recommending or suggesting an investment strategy within the meaning of Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC and Commission Delegated Regulation (EU) 2016/958 of 9 March 2016 supplementing Regulation (EU) No 596/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the technical arrangements for objective presentation of investment recommendations or other information recommending or suggesting an investment strategy and for disclosure of particular interests or indications of conflicts of interest or any other advice, including in the area of investment advisory, within the meaning of the Trading in Financial Instruments Act of 29 July 2005 (i.e. Journal of Laws 2019, item 875, as amended). The marketing communication is prepared with the highest diligence, objectivity, presents the facts known to the author on the date of preparation and is devoid of any evaluation elements. The marketing communication is prepared without considering the client’s needs, his individual financial situation and does not present any investment strategy in any way. The marketing communication does not constitute an offer of sale, offering, subscription, invitation to purchase, advertisement or promotion of any financial instruments. XTB S.A. is not liable for any client’s actions or omissions, in particular for the acquisition or disposal of financial instruments, undertaken on the basis of the information contained in this marketing communication. In the event that the marketing communication contains any information about any results regarding the financial instruments indicated therein, these do not constitute any guarantee or forecast regarding the future results.
