Bitcoin experienced a flash crash of over $3,000 during the trading session, with funds engaging in intense speculation between panic and bottom-fishing.

Eastern Standard Time, on the evening of December 31, Bitcoin experienced an extreme market event, first surging and then plummeting in a "cliff-like" drop within 48 hours, with the maximum intraday decline exceeding $3,000, leading to continuous liquidations of both long and short positions. The fluctuating expectations of the Federal Reserve's policies and the accumulation of leverage in the market became key catalysts for this round of turbulence.

Market Review: From Short Squeeze to Flash Crash

● Price Path:
- On December 29, Eastern Standard Time, Bitcoin accelerated its rise during the European and American trading hours, surging from $43,000 to nearly $48,000, with a 24-hour increase approaching +10%, clearly showing characteristics of a "short squeeze."
- Subsequently, from late night on December 30 to early morning on December 31, Bitcoin spent less than 12 hours in a high-level consolidation, quickly dropping after two failed attempts to break through the $47,000-$48,000 range.
- During the flash crash phase, the main decline saw prices plummet from about $47,500 to around $44,000, with the maximum intraday drop exceeding $3,000, and a nearly -5% fluctuation within 5 minutes, typical of a "liquidity cascade" structure.

● Volatility Characteristics:
- The 1-hour candlestick body during the day far exceeded the recent average volatility, with the actual intraday fluctuation (high-low price difference) exceeding $4,000, significantly higher than the average over the past 30 days.
- In the futures market, the funding rate for BTC perpetual contracts rose to 0.03%-0.05%/8h during the surge phase, with high-leverage long positions concentrated, amplifying the "liquidation effect" after the drop.
- During extreme periods, the spot and contract prices briefly showed a basis exceeding $50, reflecting a sudden breach of matching depth and a "vacuum area" in the order book.

Leverage Link: Liquidations and Capital Migration

● Liquidation Data:
- According to multiple data platforms, the total amount of liquidations across the crypto derivatives market exceeded $500 million in the past 24 hours, with BTC accounting for about 60%-65%.
- Within the 1 hour of Bitcoin's main decline, the liquidation amount approached $200 million, one of the highest single-hour values in the past half month.
- In terms of long and short structure, liquidations were primarily from long positions, with the amount of long liquidations being roughly 3-4 times that of shorts, confirming the concentrated backlash against the previous round of long positions that were squeezed.

● Changes in Leverage Structure:
- The total open interest in BTC perpetual contracts on exchanges reached a new high during the price surge phase, with the nominal value of open contracts increasing by about 15%-20% compared to a week ago.
- After the flash crash, the scale of open contracts significantly declined, with some platforms showing a reduction of about 10%-15% in BTC open interest (OI), indicating that high-leverage funds were "passively deleveraging."
- There was a clear shift in leverage preferences: the trading volume of mainstream coin contracts like ETH increased, while BTC's share in derivatives trading slightly decreased, reflecting a "rotation of assets" among some short-term leveraged funds.

● Capital Migration Signals:
- The net inflow of BTC on some centralized exchanges switched before and after the drop: during the rise, there was a slight net inflow, while during the drop, there was a brief net outflow of thousands of BTC, followed by a return of bottom-fishing capital, overall showing a "panic selling + bargain hunting" dual game.
- The transaction share of dollar stable assets (USDT, USDC, etc.) on mainstream trading platforms significantly increased during the turbulent period, indicating a simultaneous amplification of hedging and intra-market reallocation demands.

Macroeconomics and Regulation: External Environment Amplifying Volatility

This flash crash was not an isolated event but the result of multiple resonances from macro expectations, regulatory signals, and market structure.

● Macroeconomic Expectations Fluctuating:
- Market expectations for the Federal Reserve's interest rate cuts in 2024 have been frequently adjusted in the past week, with significant discrepancies between the dot plot and federal funds futures, leading to overall volatility in risk assets.
- U.S. Treasury yields experienced significant intraday fluctuations of 10-15 basis points on some trading days, causing the risk premium of high-volatility assets to be repriced, with Bitcoin as a "high Beta asset" being the most affected.

● Regulatory and Compliance Expectations:
- The U.S. regulatory stance on crypto assets continues to be characterized by a combination of "verbal toughness + practical advancement," maintaining high pressure on compliance requirements while releasing structural benefits in areas like spot trading products.
- The market's speculation on the approval process for Bitcoin-related trading products has become an important backdrop for recent emotional fluctuations: any minor adjustments in approval timing and details can be magnified into "unexpected positive or negative news."

● Liquidity Environment:
- The end of the year and the beginning of the year are traditionally sensitive periods for liquidity in financial markets, with some institutions adjusting their balance sheets and risk exposures, potentially exacerbating transmission on the chain.
- In the crypto exchange space, the depth of the order book has significantly contracted compared to the peak of the bull market, with single sell orders of several million dollars capable of penetrating multiple buy levels, triggering chain liquidations and passive selling.

Emotional Divergence: Panic, Bargain Hunting, and Wait-and-See Coexisting

● Emotional Indicators and On-Chain Signals:
- The Fear and Greed Index was still in the "greed zone" the day before, but quickly fell back to near neutral after the flash crash, indicating a shift in sentiment from exuberance to caution in a short time.
- Some on-chain data pointed to **short-term traders (holding time <3 months)** showing significant selling pressure, while long-term holders (>1 year) had limited supply momentum, indicating that short-term sentiment changes dominated this volatility.

● Market Participant Behavior Stratification:
- Retail Investors: High-leverage retail investors clearly chased prices at high levels, with liquidation data showing that small accounts primarily faced long liquidations. This portion of capital generally chose to "exit first and observe" after the flash crash.
- Institutions and Whales: Some institutions and large addresses exhibited phased buying behavior during the decline, using deep discounts and short-term panic to engage in "contrarian positioning," but the overall pace remained cautious.

Long-Short Game: A Direct Collision of Two Narratives

● Optimistic/Bullish Perspective:
- Optimists believe that this flash crash is mainly a technical correction of the previous rapid rise, rather than a trend reversal:
● The long-term fundamentals have not shown structural deterioration, and macro liquidity expectations still point towards a medium to long-term easing tendency.
● Institutional participation continues to rise, with compliant products and traditional financial bridges providing new entry paths for off-market capital.
● The supply from long-term on-chain holders remains tight, with no large-scale sell-offs observed, indicating that the "believers" have not been shaken by this volatility.
- In their view, the sudden drop of around $3,000 is more like a "healthy reshuffling" of excessive leverage, clearing space for more stable upward movements in the future.

● Pessimistic/Bearish Perspective:
- Pessimists worry that this severe volatility has exposed several vulnerabilities in Bitcoin's current market structure:
● The leverage usage rate has been high for a long time, and any excessive concentration of sentiment on either side could trigger a similar "avalanche" of deleveraging.
● Liquidity has been significantly insufficient during certain trading periods, with large orders impacting prices beyond the usual levels seen in traditional asset markets.
● The combination of macro and regulatory uncertainties means that any negative news could become a trigger for a new round of selling.
- They believe that if there is no sustained recovery in trading volume and buy-side depth, Bitcoin still faces the risk of further "testing the waters" downward.

Outlook: The Key Lies in Clearing Leverage and Restoring Liquidity

In the short term, the market will continue to focus on three key dimensions: first, whether leverage clearing is in place, whether the decline in liquidations and open contracts has effectively cleaned out high-risk positions; second, the marginal changes in macro and regulatory rhythms, including Federal Reserve statements and compliance product progress, and whether they can bring stable expectations to risk assets; third, the recovery of spot buying and order book depth, determining whether each decline results in "buying pressure" or "cascading sell-offs." Until these variables become clear, Bitcoin prices are likely to maintain high volatility characteristics, and investors need to pay more attention to position control and risk hedging, focusing on "managing drawdowns" rather than blindly chasing extreme short-term fluctuations.

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