On January 4th, Eastern Standard Time, around the release of the Federal Reserve's December meeting minutes, the price of Bitcoin accelerated its plunge from above $44,000, hitting a low of $42,000 during the day, marking one of the largest single-day declines since the halving. Leveraged long positions were concentrated in liquidation, with the total amount liquidated across the network reaching $1.2 billion to $1.3 billion within 24 hours, and the number of passive liquidation contracts approached a two-month peak. This round of decline occurred at the intersection of a pullback in U.S. tech stocks, a rebound in the U.S. dollar index, the digestion of halving expectations, and the marginal dulling of ETF narratives, once again exposing the crypto market's sensitivity to liquidity and policy expectations under the spotlight.

Multiple Signals of Leverage Liquidation and Capital Flow

● Leverage squeeze: According to the report, during the process of BTC breaking down from $44,000 to $42,000, long positions on major exchanges were concentrated in liquidation, with the total amount liquidated across the network exceeding $1.2 billion, of which over 70% were long positions, indicating that the downward pressure was primarily driven by deleveraging rather than large-scale spot selling.
● Increased trading volume: The trading volume of BTC perpetual contracts on mainstream platforms increased by 40%–60% during the day, with some platforms recording hourly transaction peaks not seen in the past month within two hours of the drop, as short-term high-frequency trading and trend-following capital combined, accelerating the price "stampede."
● Funding rate reversal: The previously high positive funding rates dropped sharply after the crash, with most platforms' BTC perpetual contract funding rates turning to close to 0 or slightly negative, indicating a shift in capital from chasing long positions to a more neutral or slightly bearish defensive posture, with the crowding of leveraged long positions being cleared out.
● Weaker futures structure: The annualized premium rate of BTC futures fell from a previous high of 10%–12% to around 5%, with some contracts briefly trading at a discount, reflecting a marginal cooling of institutional and arbitrage expectations for short- to medium-term price increases, significantly compressing the basis trading profit window.
● Cooling sentiment for spot ETFs: The report shows that the enthusiasm for potential BTC ETF inquiries in the over-the-counter market has declined from the mid-December peak, and the pace of narrowing discounts for Grayscale trusts related to ETF concepts has slowed, with some capital choosing to cash in on earlier "regulatory favorable" profits.
● On-chain capital flow: On-chain data shows that after the price fell below $43,000, the activity of large BTC transfers increased, with on-chain transactions of over 1,000 BTC significantly rising, indicating that large holders were rebalancing their positions; meanwhile, the selling pressure from short-term profit-taking significantly eased after breaking below previous high areas, with the on-chain "profit output" indicator rapidly retreating from high levels.
● Changes in exchange inventory: Some centralized exchanges saw a short-term increase in net inflows of BTC after breaking below $43,000, but signs of a return to over-the-counter and cold wallets appeared again below $42,000, with the overall change in inventory still lower than during the peak phase of 2021, indicating that this round was not a widespread panic sell-off, but rather a concentrated cleaning targeting high leverage and short-term positions.

Discrepancy Between Macro Expectations and Crypto Sentiment

This round of Bitcoin's "deep squat" is not an isolated technical event, but rather a result of the overlap between macro expectation fluctuations and the misalignment of internal crypto leverage structures. On one hand, the Federal Reserve's December meeting minutes released a more restrained signal regarding the market's previously aggressive bets on the interest rate cut path for 2024, with the implied number of rate cuts in federal funds futures dropping from nearly 6 to the range of 4–5 for the year. The rebound of the U.S. dollar index and the rise in U.S. Treasury yields have created headwinds for high-volatility assets represented by BTC in terms of pricing, as any hints of rising real interest rates will quickly translate into a contraction of risk appetite through valuation models for crypto assets that still heavily rely on global liquidity.

On the other hand, the halving event and potential spot ETFs have already been largely traded in advance due to their previous significant price increases. The report indicates that BTC has nearly doubled from its low in October to its high in December, far exceeding the synchronized recovery of fundamental indicators such as on-chain activity and user numbers, with capital clearly ahead in terms of sentiment and narrative. Against this backdrop, the continuous accumulation of on-chain and market leverage, along with high futures premiums and funding rates, has formed a fragile structure that is extremely sensitive to negative macro surprises. This round of adjustment coincidentally landed at the resonance point of the Federal Reserve's minutes, the pullback of U.S. tech stocks, and the timeline for ETF approval, turning what could have been a mild correction into an amplified deleveraging wave.

Structurally, the behavior of long-term holders has diverged significantly from that of short-term capital. The report points out that the long-term dormant supply on-chain has not seen concentrated activity due to this round of decline, with old coins that have not moved for over two years remaining relatively silent, indicating that the classic "top turnover" signal is not yet sufficient. Conversely, more short-term positions that entered within the last three months and profited in the $38,000–$43,000 range have chosen to take profits and exit under the dual disturbances of macro and sentiment, making the price adjustment more a reflection of profit-taking and risk reduction. In a phase where macro conditions have not completely shifted to easing, while the crypto market has already overdrawn easing expectations, such discrepancies leading to violent fluctuations may occur repeatedly.

The Tug-of-War Between Bullish Beliefs and Bearish Defenses

Surrounding the adjustment that broke below $42,000, there has been a noticeable divergence between bulls and bears in the market. Some bullish viewpoints argue that this round of decline is essentially a healthy leverage washout, as evidenced by the stability of long-term on-chain positions and the absence of uncontrolled outflows from exchange inventories, which is not enough to define it as a cyclical top. Supporting this judgment is the fact that since the end of 2022, every round of upward movement in BTC has been accompanied by similar "deep squat" actions; for example, around the important thresholds of $30,000 and $35,000, the market also experienced rapid intraday pullbacks of around 10%, followed by a resumption of the upward trend under the condition that fundamentals did not deteriorate. In the eyes of the bulls, as long as the mid- to long-term narratives of halving and ETFs are not fundamentally disproven, the current correction is more about creating space for future movements rather than signaling the end of a bull market.

In contrast, the defensive bears and cautious capital emphasize the necessity of macro constraints and valuation digestion. In the eyes of these investors, the current position of BTC already implies an optimistic assumption regarding at least several rate cuts in 2024 and the smooth rollout of spot ETFs, and these forward-looking prices carry time lags and uncertainties in their real-world implementation. If the Federal Reserve signals "maintaining high rates for longer" in the first half of the year, or if the initial capital inflows into ETFs fall short of expectations, the current price range may be re-evaluated by the market. Additionally, the recent surge in small-cap tokens and the frenzy in the meme sector have also been interpreted by bears as signs of "emotional diffusion in the later stages of a bull market," making them more willing to maintain a high hedging ratio after this round of volume-driven decline and profit from the drop in volatility through selling call options.

This tug-of-war between bulls and bears is particularly evident in the derivatives market. On one hand, some capital buying on dips has begun to accumulate call options around $40,000, betting that this round of adjustment is a temporary fake-out; on the other hand, risk-hedging positions continue to buy deep out-of-the-money put options, attempting to lock in portfolio net value in extreme scenarios. The interplay between the two has kept implied volatility significantly higher than the average level in November after sharp fluctuations, indicating that the market's divergence regarding future price ranges has not truly converged.

Repricing of Key Time Windows and Price Ranges

In the short term, the market's focus will continue to be on several key time nodes and price levels. From a temporal perspective, the upcoming Federal Reserve meetings, the release schedule of U.S. core inflation data for Q1, and the formal rollout of potential BTC spot ETFs along with the first week's capital inflow will all have directional impacts on risk appetite. If the interest rate path expectations are further downgraded during these events, and ETF products can deliver stable net inflows of hundreds of millions of dollars daily, then this round of adjustment breaking below $42,000 is more likely to be viewed historically as a "technical reshuffle." Conversely, if macro data remains stubborn, the Fed's stance is hawkish, or ETF expansion does not meet expectations, the market may need to undergo a longer period of range-bound fluctuations to complete valuation rebalancing.

From a price structure perspective, the $40,000 integer level and the area below $38,000 are increasingly seen by traders as the central support zone for this round of market movements. If this zone fails to hold with increased volume, technical analysts will begin to reassess the potential for a retracement of previous gains. On the upside, a stable recovery above $43,000–$44,000 and effectively reclaiming the high-leverage dense area before this round of sharp decline is necessary to repair the bullish structure broken in short-term trend trading models. For most medium- to long-term allocators, the key may not be to capture every short-term fluctuation, but rather to assess the direction of the macro and regulatory narratives during the aforementioned key time windows, thereby deciding whether to continue holding high positions or gradually implement risk hedging during rebound phases.

Overall, this round of BTC's "deep squat" serves as a reminder to the market that the narratives of halving and ETFs cannot eliminate high-volatility assets' dependence on macro liquidity, nor can they change the self-reinforcing characteristics of leverage cycles within the crypto market. In the coming period, how to construct more resilient strategies using tools such as spot, futures, and options while respecting macro constraints will become the main topic for institutions and mature traders.

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