Why is the crypto market down today?

The cryptocurrency market took a hit today, with the total market capitalization dropping by around 6.3% to about $3.35 trillion on Jan. 8 as strong US economic data pointed toward potential interest rate hikes.

Let’s look closer at the factors driving the crypto market down today.

Bitcoin leads the market slump

Today’s crypto market decline is part of a correction that started during the early New York trading hours on Jan. 7 when Bitcoin (BTC) lost the $100,000 level, as two stronger-than-expected US economic data prints quelled the early-year momentum by crypto assets. 

BTC price dropped as much as 6.35% to an intra-day low of $05,279 on Jan. 8. The decline in the pioneer cryptocurrency triggered panic selling among crypto investors, with prices dropping across the board.

Ether (ETH) lost all the gains made over the last seven days, dipping as low as $3,300 on Jan. 8, recording 10% losses over the last 24 hours.

Other top-cap cryptocurrencies posting significant losses on Dec. 16 are Dogecoin (DOGE), Cardano (ADA)  and Solana (SOL), which are down 12%, 11.7% and 10%, respectively.

The sharp decline in prices liquidated nearly $631 million long positions across derivatives markets betting on rising prices, according to CoinGlass, marking the first large leverage flush of the year. Long BTC leveraged positions totaling $111 million were liquidated on the day.

A similar move was seen on Dec. 18 in the derivatives market when more than $844 million long positions were liquidated. These liquidations accompany a 12% drop in TOTAL—the combined market capitalization of all cryptocurrencies—with more than $1.2 billion being wiped off the crypto market.

A predominance of long liquidations suggests that the crypto market was overleveraged on the bullish side, primarily due to profit-taking and risk-off mode following strong US economic data. 

Strong US economic data triggers risk-off mode

The ongoing correction in the crypto market mirrors the weakness witnessed in US equities. The S&P 500 dropped by 1.1% to close the day at 5,509.03 on Jan. 7, while the Nasdaq composite index declined by 375 points. 

The Dow Jones index clocked its second consecutive daily loss, dropping 0.61% to close the trading day on Jan. 7 at 42,528.36. 

“The S&P 500 is now down 75 points today and has erased its year-to-date gain,” said capital markets commentator The Kobeissi Letter in response to the market’s reaction to the economic data prints.

“Over $625 billion of market cap has been erased from the stock market today.”

The strong data also has investors further lowering their expectations of rate cuts by the Federal Reserve in 2025. This impacts investor sentiment toward riskier assets like cryptocurrencies.

Market participants now see just a 95% chance of interest rates remaining the same at the central bank’s Jan. 29 meeting, up from 90.4% just a week ago and 62.7% over a month ago, according to the CME FedWatch tool.

Zooming out even further, the odds of rate cuts in March and May are below 50% at 37% and 42%, respectively.

Crypto market flips 50 SMA into resistance

The latest drawdown in crypto prices has seen TOTAL—the combined market capitalization of all cryptocurrencies—lose the 50-day simple moving average (SMA) support at $3.35. 

Additionally, today’s drop in the crypto market is preceded by a bearish divergence between its price and the relative strength index (RSI), as shown in the chart below.

Notably, TOTAL rose between Nov. 5 and Dec. 31, forming a series of higher lows. But, in the same period, its daily RSI descended, forming lower lows.

​​A divergence between rising prices and a falling RSI indicates weakness in the prevailing uptrend, prompting traders to sell more at local highs.

If the selling intensifies, the crypto market will likely drop toward the $3.18 trillion support embraced by the ascending trendline. Note that this line has acted as support for TOTAL since the US election on Nov. 5.

On the other hand, a resurgence in buying pressure could push the crypto market cap back above the 50-day SMA and toward the local high of $3.54 trillion reached on Jan. 6.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.