Why Bitcoin’s drop below $40K is flashing mixed signals for traders

• Bitcoin dropped below the critical $40,000-level
• Despite bearish trends, the market maintains a balanced mix of long and short positions

In a surprising twist of events, Bitcoin (BTC) has seen its value plunge below $40,000. This marked a significant downturn from its recent high of approximately $49,000 on 11 January 2024. 

While the $40,000-mark is considered a crucial psychological level for Bitcoin, experts believe that a breach of this level may not necessarily trigger a widespread sell-off. In fact, the next support level is projected to be around $38,000​.

Rising market uncertainty

Greek.live took to X (formerly Twitter) to highlight the hike in market uncertainty and expectations of price variability. 

Bitcoin fell below the $40,000 as short-term IVs recovered. Overall VRP(volatility risk premium) has risen, and the Skew curve is skewed towards put options.
The above option data reflects the existence of a certain number of short-term panic orders in the market, the market… pic.twitter.com/D5wnuhSWz2

— Greeks.live (@GreeksLive) January 23, 2024

A rising VRP suggests that the options market expects future volatility to be higher than what recent historical data indicates. This can be seen as a sign of uncertainty or risk aversion among investors.

This skewness indicates that traders are more concerned about potential downside risks. Short-term orders might be driven by fear of further declines, prompting traders to take quick, protective actions.

Reasons behind Bitcoin’s downfall

The cryptocurrency market is seeing a general trend of weakness across all digital assets following a significant surge last year. In fact, Bitcoin’s value soared by approximately around 160% in 2023. 

This upward trend was largely driven by expectations that the U.S. Securities and Exchange Commission (SEC) would approve the introduction of spot Bitcoin exchange-traded funds (ETFs). 

However, following the SEC’s approval, the markets began to retract some of these gains. This was influenced by a trend of selling in response to the news, which has not been sufficient to counterbalance the profit-taking actions by speculative traders.

BTC’s current market scenario

At press time, BTC was exchanging hands at $39,108. This marks the first time the cryptocurrency has fallen to this price point since early December. 

The Relative Strength Index (RSI) registered a reading of 34.18, indicating a potential undervalued status in the market. Concurrently, the Chaikin Money Flow (CMF) measured at -0.02, suggesting a slightly negative market sentiment.

Looking at the longer timeframe (weekly chart), the RSI presented a more bullish outlook at 58.29, although it has been on a declining trend. Meanwhile, the CMF stood at 0.16, indicating a moderately positive inflow of money into the market.