Bitcoin has fallen nearly 30% in the past week. Some experts think it will go lower.
As bearish sentiment pervades financial markets, experts are weighing whether bitcoin will fall below the $20,000 mark.
What happens if it does break?
The entire crypto market is currently in a bear market, with BTC trading at just over $22,000, having almost halved from its previous all-time high of $69,000, a decline that most observers attribute to worsening macroeconomic conditions, such as inflation and interest rates.
Almost all eyes are now on the $20,000 line, not only because it is an important psychological resistance level, but also because it represents a time marker for bitcoin's last bull market peak in 2017.
In previous bear markets, bitcoin has never fallen below its price at the peak of the previous bull market. The difference this time is that bitcoin has a much shorter distance to cross that mark.
Bitcoin's long-term value proposition remains intact
Swan Bitcoin analyst Sam Callahan believes that based on the experience of past bear markets, bitcoin could fall around 80% from its all-time high, as it did in December 2018 when it fell to just over $3,000, meaning bitcoin could fall to $13,800 this cycle.
But even so, Callahan isn't that worried.
It's important to note that bitcoin's investor base is very different and more complex than in previous bear markets, Callahan said. If bitcoin breaks below $20,000, I think we'll see significant buying pressure at those levels as the long-term value proposition remains intact.
Yuya Hasegawa, market analyst at Japanese crypto exchange Bitbank, echoed that view.
Hasegawa said last month that bitcoin could fall to $12,200 in this bear market. But she is optimistic about the industry's prospects.
"I think bitcoin will probably go below $20,000, but it will get back to normal soon," Hasegawa said.
Liquidation cascade occurs
But not everyone is so sanguine.
Marcus Sotiriou, an analyst at UK-based cryptocurrency firm Global Block, said bitcoin could fall further if it falls below $20,000. Sotiriou pointed to the recent controversy surrounding crypto loan company Celsius, the possibility of insolvency and apparent liquidity.
"Celsius is in serious trouble," he said. "If the whales who made leveraged bets on Bitcoin and Ethereum are liquidated, it will cause the market to fall further."
"I think many people will be worried about a liquidation cascade, like Celsius being asked for margin calls, and now the liquidation price of their BTC positions is about $17,000," Sotiriou said.
Forced liquidation occurs when investors must involuntarily liquidate their Bitcoin derivatives, such as futures and options, after they do not have enough collateral in their accounts to sustain those positions. This forced selling puts additional downward pressure on the price of bitcoin, which in turn pushes the price down further, leading to more liquidation, thus creating a "liquidation cascade."
Arthur Hayes, former chief executive of BitMEX, also highlighted the possibility of such a risk on Twitter yesterday. Speaking about the crypto derivatives market, Arthur Hayes noted that the majority of open interest, the number of futures and options contracts outstanding, currently stands at $20,000 for Bitcoin and $1,000 for Ethereum.
Hayes said the closer the market gets to that level, the more position traders need to sell their cryptocurrencies in the spot market to hedge their positions. If this level is breached, the market can be expected to come under greater selling pressure.
How bad will it get? "You might as well turn off your computer because the chart will be useless for a while," Hayes said.