Should You Be Catching a Falling Knife?

Recent developments in the cryptocurrency market have resulted in a significant price correction, with Bitcoin reaching a four-month low on Friday. The cryptocurrency dropped to a low of $53,500 following the announcement that the now-defunct Mt. Gox exchange has started repaying its creditors.

Additional pressure on Bitcoin came from the German authorities transferring approximately $75 million worth of cryptocurrency, which had been confiscated from a piracy site, onto various exchanges. Furthermore, minutes from the recent Federal Reserve meeting indicated that the central bank is not yet prepared to lower interest rates, which typically diminishes investor interest in riskier assets like Bitcoin.

Following this decline, Bitcoin managed to rebound slightly, trading near $55,700 at the time of reporting.

### Reasons for Bitcoin’s Decline

The Bitcoin price correction is largely attributed to renewed focus on the nearly $9 billion in payouts due to users of the defunct Mt. Gox exchange. Nobuaki Kobayashi, the trustee in charge of the Mt. Gox bankruptcy estate, announced that repayments to some creditors in Bitcoin have commenced through selected crypto exchanges. He did not provide specific amounts regarding these transactions.

Kobayashi stated that future distributions depend on several conditions, including the validation of accounts and ongoing discussions between the trustee and crypto exchanges. He reassured that the repayment process is designed to be “safe and secure” and urged eligible creditors to be patient.

At one time, Mt. Gox was the largest Bitcoin exchange, responsible for 70% of global Bitcoin transactions. The exchange ceased operations in February 2014 due to a significant hacking incident, and its former CEO faced legal consequences for altering records. Ten years later, the trustee has only recently begun to process refunds, after facing numerous delays.

The reimbursement process began last year, with various creditors confirming they received payments via bank transfers in Japanese yen.

Additional downward pressure on Bitcoin’s price came from a large transfer of Bitcoin reserves by the German government, following seizing funds from the piracy site Movie2k.to. The German Federal Criminal Police Office executed multiple transactions on July 4th, moving around $75 million in Bitcoin across different platforms. This action follows a series of transactions in which Germany transferred around $315 million worth of Bitcoin since mid-June, amounting to over $390 million in total in less than a month.

Moreover, the Federal Reserve’s latest meeting minutes revealed that officials are hesitant to cut interest rates until there is clear evidence of progress towards the central bank’s 2% inflation target. Higher interest rates typically discourage investments in riskier assets like Bitcoin and other cryptocurrencies.

Earlier this year, Bitcoin reached an all-time high of over $73,700 in March, following the Securities and Exchange Commission’s approval of the first U.S. spot Bitcoin exchange-traded fund (ETF).

### Bitcoin Price Outlook

Bitcoin’s price has subsequently pulled back 27% from its recent high and is nearing the 38.2% Fibonacci retracement level, which is the first major support area located just below $52,000. Should the price fall below this threshold, it could signal a deeper decline, with the $48,000 area serving as the next key support level, as this zone has historically acted as significant trading support.

On the upside, Bitcoin would need to reclaim levels above $60,000 for bearish sentiment to fade and for bullish momentum to return.