After an unusually long period of low volatility, the price of Bitcoin fell suddenly over the 17/18th August 2023 from over $29,000 to below $26,000. For the previous 8 weeks Bitcoin had been trading within a relatively narrow band between $29,000 and $31,000.

Many believe it was negative macro sentiment that triggered the sell-off, with fears about the worsening state of China’s economy and the expectation of rates staying ‘higher for longer’ at the forefront. Some felt the sell-off could be due to concerns that the first spot Bitcoin ETFs in the U.S. would not be approved by the SEC as soon as hoped. SpaceX also announced that they have written down the value of their Bitcoin holdings by $373 million – maybe that was the culprit? Regardless of the actual catalyst, the speed and strength of the price movement was astonishing, especially given the period of low volatility the previous 2 months.

So why did the price drop so dramatically? The main reason is because leveraged crypto positions, especially leverage long positions amounting to $855m, were liquidated. A leveraged position typically uses debt financing to boost an investor’s total exposure and upside potential. The flipside is that when investors are wrong and markets move sharply against them, their costs amplify and their positions are often automatically liquidated by exchanges and trading venues.

At the time of publishing (August 23, 2023), Bitcoin was still steady at the $26K mark.(See Graph below).

Stay calm and carry on HODLing

What is interesting to observe about investors in Bitcoin is that the HODL culture is still very much in place – basically buying and holding Bitcoin for the long haul. The term HODL, according to Investopedia, originated in a post on the Bitcointalk forum, as a simple typo in the header of post for the word holding, “I am hodling”, that has been embraced with a sense of fun by Bitcoiners ever since.

The HODL culture is clear in the data, where we see that in the past year 70% of bitcoin circulating supply has not moved, meaning it has stayed in the same wallet, and in the past 2 years, 50% of Bitcoin’s circulating supply has not moved. Importantly this period includes November 2021 when Bitcoin traded up to over $67,000, a tempting level for Bitcoin investors to realise gains.

The same is true in reverse, as recounted by famed investor Stan Druckenmiller when he received a call from billionaire hedge fund manager Paul Tudor Jones. Jones told him: “Do you know that when bitcoin went from $17,000 to $3,000 that 86% of the people that owned it at $17,000, never sold it?” Druckenmiller admitted: “This was huge in my mind. So here’s something with a finite supply and 86% of the owners are religious zealots.”

Bitcoin Oversold?

 I read with interest a Coindesk article about Bitcoin being oversold. The thesis is that when the Relative Strength Index or RSI for Bitcoin is below 30, it is oversold and conversely, when the RSI is over 70, it indicates overbought conditions. Bitcoin hasn’t registered an RSI this low since March 2020 when there was a large sell off because of the start of the first COVID-19 lockdowns.

Of course, one can always interpret charts and technical analysis in general according to one’s own secular view. So whether this RSI score indicates:

1. that Bitcoin has been oversold and a bullish reversal is now due, or
2. that this overselling reinforces bearish momentum, or
3. just that the speed of the sell off, exacerbated by the liquidation of leveraged positions, was extreme... 

… is really up to you.

What certainly does ring true is the old adage that the article mentions that “indicators can stay oversold longer than dip buyers can stay solvent”!