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    Why Bitcoin Dropped More Than 6% at Its Low Today

    What happened

    Bitcoin (CRYPTO:BTC) prices fluctuated wildly in early morning trading Wednesday, with traders apparently smashing the sell button.

    As of around 5 a.m., the price of Bitcoin had fallen to a low of $54,371, erasing all the gains it had made this week. However, before noon, the tokens had recovered to more than $56,000.

    Comments from JPMorgan Chase CEO Jamie Dimon Tuesday that Bitcoin is, in his opinion, “worthless” don’t help the cause. Additionally, there were reports this week that the share of futures contracts that were crypto-margined had dipped below the share that were cash-margined. That’s a development that cryptocurrency traders are watching with interest.

    Image source: Getty Images.

    So what

    The cryptocurrency world remains highly reliant on positive sentiment. Dimon’s recent comments obviously shift the focus of the conversation to a topic that many cryptocurrency bulls don’t want to discuss — the fundamental inherent value of these tokens. Like it or not, every time this discussion heats up, volatility in cryptocurrency prices tends to follow suit.

    Additionally, traders buying and selling futures contracts can provide different margin collateral for their trades. Using cryptocurrencies as collateral can accelerate the volatility in the markets. Should token prices drop, it can force heavy selling of those assets, triggering further volatility in the markets. Investors are moving to reduce their risk exposure by using cash for trading collateral. In the view of cryptocurrency watchers who use the percentage of futures contracts that are coin-margined as a measure of sentiment regarding tokens, that gauge is not pointing in the right direction.

    Now what

    Volatility has been higher for cryptocurrencies broadly in recent days, and much of the movement has been downward. Investors appear to be taking a measured approach to risk assets. For those who remain bullish about where Bitcoin prices are headed, a breather like this one can be a good thing.

    However, for those with bearish views on Bitcoin, recent conditions could be viewed as harbingers of more declines to come.

    This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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