Bitcoin price fell below the critical $60,000 support level, hitting a low of $57,914. Bitcoin has seen a further 7% decline since Tuesday, strengthening the ongoing downtrend. Market sentiment is now clearly shifting to the bearish side.

Is a May 2021-style Bitcoin crash coming?

Andrew Kang, co-founder of Mechanism Capital, has lifted solemn concerns about a pattern emerging in the Bitcoin market reminiscent of the conditions that led to the dramatic crash in May 2021. In a detailed analysis shared via X (formerly Twitter), Kang highlighted an overlooked criticality of the current market energetic.

Kang stated, “Most market participants underestimate the significance of a potential 4-month range loss for Bitcoin. The closest comparison we can draw is the May 2021 range, when we also exited the parabolic rally in BTC and altcoins.”

He noted similarities in market conditions, particularly with respect to leveraged positions, which now exceed $50 billion. “This number excludes the Chicago Mercantile Exchange (CME), which is higher, but it is exacerbated by the fact that we have been volatile for even longer in this scenario (18 weeks vs. 13) and have not yet had an extreme washout, whereas we had several in the middle of the 2020-2021 bull run,” Kang explained.

Kang also revised his Bitcoin bottom prediction, suggesting a steeper decline than previously anticipated: “It’s possible that my initial low $50k estimate was too conservative and we see a more extreme reset to $40k.” He warned that such a pullback could significantly damage the market, requiring several months of consolidation and downtrend before any change to uptrend would be possible.

In a dialogue with Alex Krüger, a renowned macro and cryptocurrency analyst, the discussion explored the intricacies of open interest (OI) in the derivatives market, a key aspect of understanding market sentiment and directional trends. Krüger noted, “Most of these OIs are not directional though,” suggesting more convoluted market behavior than plain long and miniature positions.

In response, Kang explained the composition of OI, saying, “Each OI unit is one long + one short. Even if there are short fundamentals on the short end, there is a long directional position on the other end. So yes… fewer short directional positions.” The conversation further delved into the issue of whether derivatives traders are delta neutral, which affects market stability.

Krüger asked about market maker positions, and Kang replied, “I can assure you that there are not many market makers in OI who are delta neutral, long positions, and short-term pay financing/borrow money from both sides to get negative carry trade.”

What happened in May 2021?

This ongoing debate among experts reflects deepening concerns about a repeat of the May 2021 crash. During that period, bitcoin’s price fell sharply after peaking around $64,000 in mid-April 2021. By the end of June, it had lost about 56% of its value. The crash was triggered by a mix of factors, including a regulatory crackdown in China, environmental concerns expressed by influential figures like Tesla CEO Elon Musk, and an ensuing cascade of panic selling among retail and institutional investors.

In retrospect, the May 2021 decline was characterized by a rapid change in investor sentiment, driven by external shocks and exacerbated by high levels of market leverage. Now, Kang says, similar conditions may be forming, with high levels of leverage and long periods without significant price corrections, suggesting the market may be on the verge of another major decline.

At the time of going to press, the BTC price was $58,736.

Featured image created with DALL E, chart from TradingView.com