A renewed demand for the US dollar prompted traders to sell their profitable Bitcoin positions en masse.
The result was a 5.04 percent decline from the cryptocurrency’s recently-established yearly top at $13,863. That marked its worst one-day performance in more than a month, leaving hints of an extended downside correction after the US market opens Wednesday.
The major correction came after Bitcoin rallied by almost 25 percent in about eleven days of trading.
Its strong upside move appeared as global payments giant PayPal and Singapore’s largest banking corporation DBS launched new cryptocurrency services. Traders increased their bids for Bitcoin as they interpreted the foray of two major financial companies into the cryptocurrency space as a sign of higher Bitcoin adoption.
But technically, the rally made Bitcoin overbought, according to the readings of its Relative Strength Index (RSI). This tool measures the magnitude of an asset’s price changes to evaluate its overbought or oversold conditions.
The chart above shows the Bitcoin RSI above 70, which marks an overbought area. That typically prompts the market to neutralize its short-term sentiment. That further explains why Bitcoin underwent a sharp downside correction on Wednesday.
Strong Dollar Rebound
Bitcoin also slipped lower because of a strong rebound in the US dollar market.
On Wednesday, the US Dollar Index, a metric that measures the greenback’s strength against top foreign currencies, surged by 0.69 percent. The value flew back into the dollar as investors’ confidence in the stock and safe-haven markets decline amidst the rising number of coronavirus infections in the US and Europe.
Additionally, the uncertainty about the second coronavirus fiscal package added to the investors’ worries. They expected slower dollar liquidity into the market if the Republicans and the Democrats delay the stimulus bill even after the US presidential election on November 3.
That prompted them to sell a portion of their riskier positions and move those winnings into the US dollar instead. Bitcoin, which grew by almost 250 percent since March 2020 against the greenback’s weakness, gave up some of its gains, as a result.
A Bitcoin Rebound, Awaited
Technically, Bitcoin appears to be in a strong bullish position as long as it can hold support above $12,500. Traders may want to utilize the cryptocurrency’s dips to prepare their long-term bullish outlook, especially as its global adoption picks up momentum.
Wall Street investor Raoul Pal said Wednesday that Bitcoin is “a supermassive black hole that is sucking” capital out of every major market around – be it gold or stocks. The veteran added that the adoption low would push its price to its previous all-time high of $20,000.
Meanwhile, daytrader Nico gave a more near-term outlook. He compared Bitcoin’s latest upside rejection with a similar one from mid-2019, stating:
“Last time Bitcoin tested ~14k, a 3k red candle followed. Today a $500 red candle without even losing support on the last resistance prior to the ATH path.
“If ~13k does not hold the current pullback, then 12.4k (.618 fib // ’20 prior high) seems ok. Look [at] the big picture,” he added.