Bitcoin Dips 7% to Near $40K; Pullback Will Be Short-Lived, Say Experts

• Bitcoin tumbled over 7% in the worst daily drawdown since August as crypto markets cool off.
• Cryptocurrency prices may rally to new highs into the year-end as the pullback flushed out excess leverage and reset the market, LMAX market strategists said.

Bitcoin [BTC] over the past roughly 24 hours has suffered its steepest daily drawdown in almost four months in a massive leverage wipe-out as traders were reminded of the crypto's occasional steep bull market corrections.

Over the space of a few minutes Sunday evening, BTC plunged to near $40,500 from around $43,800 in what could be termed a "flash crash." Prices quickly recovered to $42,400, but then started to slide again during U.S. afternoon hours to as low as $40,200, a level it broke through on the way up a week ago.

At press time, the largest crypto had bounced back above $41,000, still down nearly 7% over the past 24 hours, but on track to be the worst daily drawdown since BTC's drop below $25,000 on August 17.

Ether [ETH], the second largest cryptocurrency, also tumbled over 7% in the same period to below $2,200.

Most of the rest of the cryptocurrencies also suffered large declines, with Ripple-linked [XRP], dogecoin [DOGE], native tokens of Chainlink [LINK] and Cardano [ADA] nursing 8% to 12% losses during the day.

Some altcoins defied the trend, with tokens of Avalanche [AVAX], Injective [INJ] and Optimism [OP] being among the very few gainers.

The CoinDesk Market Index [CMI], which tracks a market capitalization-weighted basket of almost 200 digital assets, was also down over 7%, underscoring heavy declines across the board.

Leverage flush

Sharp drawdowns have been part of every previous bitcoin bull cycle but have been elusive in the past weeks as BTC rose nearly without pause from $27,000 to nearly $45,000 since Oct. 1.

The current correction shouldn't have come as a surprise and was due to happen at some point, bitcoin-focused market analyst Will Clemente said. These pullbacks are necessary to unwind excessive leverage for a more sustainable price action, he added.

"BTC just [nearly] doubled in 2 months with no pullbacks, a correction is not that surprising," Clemente posted. "Corrections shake out 'weak hands' and leverage, allowing for a stronger foundation for eventual moves higher."

The decline wiped out over $520 million in leveraged trading positions on the crypto derivatives market, predominantly longs betting on rising prices, CoinGlass data shows. It was the largest level of daily liquidations in at least three months, according to the firm.

Liquidations are forceful closure of a leveraged trading position usually because the trader's margin to cover the open position has run out. Large liquidation events often mark a local top or bottom in prices.

Joel Kruger, market strategist at LMAX Group, noted that the cascading liquidations of leveraged longs intensified the current sell-off as traders faced margin calls. Additionally, a stronger U.S. dollar might have added to the crypto market weakness.

He said the pullback helped cryptocurrencies come down from overbought levels, and asset prices could continue to rally to new highs.

"We suspect these dips in bitcoin and ether will be eaten up rather quickly, in favor of higher lows and bullish continuations to new yearly highs,” Kruger said in an emailed note. “The outlook for crypto assets into the year-end remains bright."