Bitcoin experienced a sharp 7.5% decline Monday morning, marking its most significant intraday fall since mid-August.

Despite a 150% increase this year, this sudden drop serves as a stark reminder of Bitcoin's inherent volatility.

Last week's optimism around Bitcoin, buoyed by industry advancements, raises questions about today's unexpected fall. A good starting point is understanding the factors behind its recent rise.

Bitcoin Halving

Notably, Binance's agreement to a $4.3 billion fine with U.S. authorities, viewed as a significant development, has placed the ongoing legal issues of Coinbase and Kraken with the SEC in a more favourable context.

The U.S. regulatory environment appears to be softening, with legislative proposals offering glimpses into potential future regulations. Additionally, Bitcoin's upcoming "halving" and the anticipation of an SEC-approved Bitcoin ETF have been fuelling its price surge.

Macro-economic factors are also in play. Bitcoin, often compared to "digital gold," has seen parallel rallies with gold, driven partly by inflation concerns.

With the Federal Reserve's interest rate hikes aimed at controlling inflation, expectations of a rate decrease in the near future could benefit Bitcoin, making borrowing cheaper and diverting investment towards riskier assets like cryptocurrencies.

The BTC “Flash Crash”

The cause of the recent "flash crash," beginning with a market correction on Sunday night, remains unclear. Despite tech-heavy equities like Nasdaq showing gains, crypto-related stocks such as MARA and RIOT saw significant drops.

Analysts like VDX research lead Greta Yuan attribute this adjustment to macroeconomic factors, such as a strong jobs report and the Federal Reserve's potential rate cuts in 2024. Metalpha's senior analyst Lucy Hu suggests it might be a phase of "rational profit-taking" by traders.

CoinDesk's Omkar Godbole points to "overheated" funding rates in crypto derivatives and excessive bullish leverage as contributing factors.

High leverage in trading can amplify market movements, leading to rapid asset value declines when the market corrects.

This situation also resets the leverage in the market to a healthier level, serving as a cautionary tale. It highlights that in the volatile world of crypto, even when trends seem favourable, market dynamics can change abruptly.

Therefore, a prudent approach to investing in such a fluctuating market is advisable.