Understanding Bitcoin's Drop to $85,000: Key Factors Behind the Decline

On December 15, Bitcoin fell to the $85,000 mark, continuing its recent downward trend as a mix of global economic uncertainties, leverage unwinding, and low liquidity came into play. This decline wiped out over $100 billion from the overall cryptocurrency market cap in just a few days, raising concerns about whether the sell-off has stabilized.

Key Takeaways

Bitcoin's recent plunge to $85,000 is driven by several macroeconomic factors.
Anticipation of a Bank of Japan rate hike has led to global de-risking.
US economic data creates uncertainty regarding Federal Reserve policies.
Heavy leverage liquidation resulted in rapid price declines.
Low liquidity conditions intensified market volatility and price swings.

While there wasn’t a singular cause for this decline, five interconnected factors contributed to Bitcoin's downward momentum and could maintain selling pressure in the short term.

Bank of Japan Rate Hike Fears Lead to Global De-Risking

The primary macroeconomic driver behind Bitcoin's drop originated in Japan. Markets began reacting to a highly anticipated rate hike by the Bank of Japan expected on December 19, which would push Japanese interest rates to levels not seen in decades.

Even a small increase can have significant implications since Japan has historically propelled global risk markets through the yen carry trade.

People are seriously underestimating the impact of Japan's moves on Bitcoin.

The Bank of Japan is expected to announce a rate hike soon.

While this might not seem significant, it's important to understand that Japan is the largest holder… pic.twitter.com/0a9Aimfn88 — NoLimit (@NoLimitGains)

For years, investors have borrowed low-cost yen to invest in riskier assets, including equities and cryptocurrency. As Japanese rates rise, this trend will reverse, forcing investors to sell off risk assets to repay yen-denominated loans.

Bitcoin has historically experienced sharp declines following past rate hikes by the Bank of Japan. In the last three hikes, BTC dropped between 20% and 30% in the subsequent weeks. Traders were preemptively pricing in this pattern, contributing to Bitcoin's drop.

US Economic Data Creates Policy Uncertainty

Simultaneously, traders began reducing their risk exposure in anticipation of a busy week of US economic data, including inflation and employment figures.

Though the Federal Reserve recently lowered interest rates, officials exhibited caution regarding the speed of future rate changes. This uncertainty is significant for Bitcoin, which has increasingly been seen as a liquidity-sensitive macro asset instead of merely a secure hedge.

As inflation remains above target and job data is projected to weaken, the markets struggled to accurately assess the Fed's next moves. This indecisiveness led to reduced speculative interest and prompted short-term traders to withdraw.

Consequently, Bitcoin lost traction as it approached critical technical support levels.

Heavy Leverage Liquidations Accelerate the Decline

After Bitcoin fell below the $90,000 threshold, forced liquidations fueled the downward trend. Over $200 million in leveraged long positions were liquidated in a matter of hours, as reported by derivatives data. Many long traders had positioned themselves bullishly following the Fed's recent rate cut.

When prices began to decline, liquidation engines automatically sold Bitcoin to offset losses, further exacerbating the drop—a phenomenon that created a rapid and sharp decline in prices rather than a gradual one.

Crypto Liquidations on December 15. Source: Coinglass

Thin Weekend Liquidity Amplifies Price Movements

The timing of the sell-off worsened the situation. Bitcoin's drop occurred during a weekend when trading liquidity was generally low. In such scenarios, minor sell orders can heavily impact prices due to shallow order books.

Large holders and derivatives firms decreased their exposure in this low-liquidity environment, heightening volatility. This dynamic contributed to Bitcoin's swift descent from just above $90,000 to the $85,000 range within a short time frame.

Weekend sell-offs often appear dramatic, even when the underlying fundamentals remain stable.

Bitcoin Price Chart. Source: CoinGecko

Wintermute's Bitcoin Sales Add Pressure to Market

The market's stress was intensified by the significant sales from Wintermute, one of the largest market makers in the crypto space.

During the sell-off, data indicated that Wintermute sold a substantial amount of Bitcoin—estimated to be over $1.5 billion—across various centralized exchanges. The firm reportedly sold BTC to rebalance risk and cover exposure following recent market volatility and losses from derivatives trading.

As Wintermute provides liquidity across both spot and derivatives markets, its selling exerted an outsized impact on Bitcoin’s price movement.

Wintermute Bitcoin Sales
Wintermute Sending Bitcoin to Centralized Exchanges. Source: Arkham

The timing of these sales was crucial. Wintermute's activity coincided with low-liquidity conditions, which magnified the negative price moves and expedited Bitcoin’s drop toward $85,000.

What's Next for Bitcoin?

The future direction of Bitcoin will hinge more on macroeconomic developments than on crypto-specific news.

If the Bank of Japan confirms a rate hike and global yields continue to rise, Bitcoin may face ongoing pressure as carry trades unwind further. A strengthening yen could compound this stress.

Conversely, if markets fully adjust to the rate hike and US data disappoints enough to rekindle expectations of rate cuts, Bitcoin might find stability once the liquidation phase concludes.

For the time being, the sell-off on December 15 indicates a macroeconomic reset rather than a failure within the crypto market itself. However, it’s unlikely that volatility will subside in the near term.