Crypto Markets Plunge 28% as Fear Index Drops to 10

Crypto markets have recently experienced a significant downturn, with prices dropping to their lowest levels in three months. This decline has erased most of the gains that followed the U.S. presidential victory. Bitcoin, which had been relatively stable until it broke through the $92,000 support level in November 2024, rapidly fell to $80,000 before finding support.

The sentiment in the crypto market has weakened, as indicated by the Crypto Fear and Greed Index, which has dropped from a neutral level of 55 to as low as 10, signifying extreme fear. The index is currently at 34, reflecting the market's cautious mood.

The high correlation between crypto markets and traditional financial markets has also played a role in the recent price movements. Uncertainty surrounding tariffs and their potential impact on the U.S. economy has contributed to the volatility in crypto asset prices. Additionally, crypto-specific events, such as the fallout from the recent Bybit exchange hack and record outflows from spot bitcoin ETFs, have further exacerbated the decline in crypto asset prices.

Despite these challenges, the recent announcement by the U.S. administration regarding the creation of a strategic crypto reserve provided a temporary boost to crypto asset prices. Bitcoin rallied back up to the $95,000 price level following the announcement. However, the lack of clarity on how the reserve will operate and its potential benefits to taxpayers has led to a pullback in bitcoin's price, which currently stands at around $90,000.

The current situation presents a crossroads for the crypto market. Loosening financial conditions could drive crypto assets and wider risk asset prices higher. The administration's plan to lower interest rates to support struggling Americans could provide a tailwind for the market. However, further uncertainty around tariffs or the crypto reserve plans not meeting community expectations could cause bitcoin's price to drop further. The coming weeks and months will determine which narrative proves to be stronger.

Historically, bitcoin bull markets have seen retracements of 20-35% before a base is found and the next leg higher begins. The recent decline to the $80,000 level represents a 28% drop from the all-time high of $109,300, suggesting that the market may have already seen the low. However, if the price were to fall further due to the aforementioned reasons, a 35% decline from the all-time high would put the price at $70,000 before any base is potentially formed.

While the large price movements may cause fear among investors, it is important to remember that retracements in the price of any asset class or instrument are normal and expected. The market is still significantly higher than it was this time last year. Investors with ready cash and a long-term conviction in bitcoin may see this as an opportune time to add further to their overall holdings.