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The price of Bitcoin reversed its recent upswing, dropping nearly 5% to fall below $87,000 during the early Asian trading session on December 1.
This decline followed a spike in Japanese government bond yields, which sparked a widespread risk-off sentiment, fracturing a delicate and low-volume market structure.
As reported by CryptoSlate, BTC plummeted from a consolidation area near $91,000, erasing about $150 billion from the total cryptocurrency market capitalization.
The reshaping of Japan’s carry trade initiated the downturn, but data on trading volumes revealed that the selloff intensified because of a market with minimal liquidity.
10x Research noted that the cryptocurrency market recently experienced one of its lowest-volume weeks since July, leaving order books perilously thin and unable to handle institutional selling pressure.
Thus, Bitcoin’s decline was not merely a response to headlines but rather indicative of a structural breakdown at a critical resistance level.
The volume vacuum
Despite Bitcoin’s market cap of $3.1 trillion, which saw a 4% rise week-over-week, liquidity appears to have dried up.
Data from 10x Research reveals that average weekly volumes have plummeted to $127 billion. Specifically, Bitcoin’s volumes dropped by 31% to $59.9 billion, while ETH volumes fell by 43%.
This diminished participation turned what might have been a routine technical correction into a liquidity crisis.
Timothy Misir, head of research at BRN, indicated to CryptoSlate that this situation was “not a measured correction,” describing it instead as a “liquidity event resulting from positioning and macro repricing.”
He added that momentum “suddenly reversed” after a tumultuous November, creating a significant gap downward that liquidated leveraged long positions. November marked Bitcoin’s poorest month this year, erasing nearly 18% of its value.
The limited market depth meant that what might have been a 2% move during a high-volume week transformed into a 5% crash during the illiquid weekend.
A tale of two leverages
The current drop in price has led to significant liquidations, with nearly 220,000 crypto traders losing $636.69 million.
However, the selloff has also revealed a concerning disparity in trader positioning across the two largest crypto assets.
10x Research noted that Bitcoin traders have been reducing their risk exposure, while ETH traders have been aggressively increasing leverage. This imbalance has created a skewed risk profile in the derivatives market.
According to the firm, Bitcoin futures open interest fell by $1.1 billion to $29.7 billion leading up to the decline, while funding rates modestly increased to 4.3%, placing it in the 20th percentile of the past year.
This suggests that the Bitcoin market was relatively “cool” and that exposure was decreasing.
Conversely, ETH is now flashing warning signs.
Despite minimal network activity, with gas fees residing in the 5th percentile of usage, speculative excitement has surged.
Funding rates spiked to 20.4%, positioning the cost of leverage in the 83rd percentile of the previous year, even as open interest increased by $900 million.
This disconnect, marked by Ethereum’s “frothy” speculative appetite in the face of declining network utility, points to a mispricing of risk.
Macro triggers
While market structure provided the fuel, the trigger came from Tokyo.
The yield on the 10-year Japanese government bond (JGB) rose to 1.84%, a level not seen since April 2008, while the two-year yield surpassed 1% for the first time since the 2008 Global Financial Crisis.
These developments have reshaped expectations regarding the Bank of Japan’s (BOJ) monetary policy, with the market increasingly anticipating a rate hike in mid-December. This poses a threat to the “yen carry trade,” where investors borrow cheaply in yen to fund risk assets.
Arthur Hayes, co-founder of BitMEX, indicated that the BOJ has “put a December rate hike in play,” strengthening the yen and raising capital costs for global speculators.
However, macro concerns are not confined to Japan.
BRN’s Misir notes the ongoing rally of Gold to $4,250 as indicative of global traders hedging against persistent inflation or increasing fiscal risks. He remarked:
“When macro liquidity tightens, crypto, a high-beta asset, often retests lower bands first.”
With US employment data and ISM reports coming later in the week, the market must navigate a series of “event risks” that may further stress the already limited liquidity.
Retail distress and on-chain reality
The repercussions have weakened the technical outlook for Bitcoin, pushing its price below the “short-term holder cost basis,” a crucial benchmark that frequently differentiates between slight bull market dips and more profound corrections.
On-chain analysis reveals a movement of assets from smarter money to retail investors.
According to BRN’s study, accumulation by long-term holders and large wallets has slowed down. Conversely, retail investors holding less than 1 BTC have been purchasing at “distressed levels.”
While this signals some demand, the lack of whale accumulation suggests that institutional investors are biding their time for lower prices.
Misir stated:
“The key takeaway is that supply has shifted towards stronger hands, but a supply-overhang persists above important resistance levels.”
However, there remains a considerable amount of “dry powder” on the sidelines. Stablecoin balances on exchanges have increased, indicating that traders hold capital ready to invest. Yet, with Bitcoin futures positions unwinding and ETFs predominantly inactive during the weekend decline, this capital has yet to enter the market vigorously.
Given the situation, the market is now eyeing the mid-$80,000s for structural support.
Nevertheless, failure to reclaim the low-$90,000s would indicate that the recent liquidity flush could lead to further declines, potentially targeting the low-$80,000s as the fallout from the yen carry trade reverberates throughout the system.
