After reaching a historic high, Bitcoin experienced a big dump of 7000 dollars. This article analyzes three reasons for this pullback.

Written by: White55, Mars Finance

The Bitcoin market experienced a shocking scene on August 15. Just hours after setting a historic high of $124,500, the price of Bitcoin suddenly turned downwards, quickly falling below the key support level of $117,500, with a daily decline of 4.24%, reaching a low of $117,000. This plunge of up to $7,000 poured cold water on the market's recently ignited fervor.

This flash crash is not an isolated incident. The total market capitalization of the crypto market evaporated by 3.9% within 24 hours, falling to $4.09 trillion. Ethereum followed Bitcoin's decline, breaking below the $4,500 mark, currently reported at $4,568.

Even more tragic is the altcoin market, where Ethereum ecosystem tokens like REZ, SSV, and ORDI have generally plummeted over 15%, resulting in a total collapse.

The Ghost of Inflation Returns: A Fatal Reversal in Macroeconomic Data

The unexpected turnaround in U.S. inflation data has become the direct trigger for the current sharp decline. The Producer Price Index (PPI) for July, released on August 14, surged 3.3% year-on-year, far exceeding market expectations of 2.5% and the previous value of 2.3%, marking the largest monthly increase since June 2022. This stands in stark contrast to the "moderate" CPI data released three days earlier – at that time, the overall CPI for July fell to 2.9%, and the core CPI decreased for four consecutive months to 3.2%, which had led the market to be hopeful about a rate cut from the Federal Reserve.

Deep anxiety of inflation stickiness

Traders' intense reaction to the PPI data stems from its leading indication of corporate costs and consumer prices. Higher producer prices will eventually be passed on to the consumer side, forcing companies to raise prices to maintain profit margins, creating an inflationary spiral. This signal quickly altered interest rate expectations: the CME FedWatch tool shows that while the market still expects a 90.5% chance of a rate cut in September, the probability of rates dropping below 3.75% in January 2026 has decreased from 67% a week ago to 61%. The likelihood of the Federal Reserve delaying easing policies instantly withdrew the upward momentum of risk assets.

Warning signals of stock currency divergence

Ironically, the traditional stock market quickly rebounded after digesting the PPI data, with the S&P 500 index hitting record closing highs for three consecutive days, while Bitcoin found itself deeply trapped in a selling vortex. This phenomenon of divergence in risk assets reveals the vulnerability of the cryptocurrency market—when liquidity expectations undergo subtle shifts, crypto assets often become the first targets for cashing out.

Policy expectations fall short: The national Bitcoin reserve dream shatters

Scott Bessent interview. Source: Foxbusiness.com

While the Bitcoin community is still dreaming of the U.S. government incorporating it into its strategic reserves, Treasury Secretary Scott Basset poured a cold water on those hopes. In an interview with Fox Business News, he clearly stated: "The government has no plans to expand Bitcoin's strategic reserves" and categorically denied the possibility of allocating the revaluation gains from government bonds to Bitcoin.

The expected gap of Trump's executive order

This statement forms a huge gap with market expectations. In March, an executive order signed by Trump clearly mentioned a "budget-neutral strategy for purchasing more Bitcoin," igniting institutional investors' imagination about sovereign funds entering the market. Besant's remarks not only shattered this expectation but also exposed discrepancies in policy implementation. When the narrative of "digital gold" encounters a lack of sovereign credit endorsement, it becomes an inevitable choice for speculative funds to quickly withdraw.

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The chain reaction of regulatory cold waves

Policy bearishness creates a domino effect. Although the U.S. SEC has withdrawn lawsuits against some crypto projects, key legislation such as the "GENIUS Act" is still advancing, and the ambiguity of the regulatory framework remains like the sword of Damocles hanging overhead. Moreover, discussions in countries like Germany and Japan regarding sovereign Bitcoin reserves are still only on paper, and institutional funds in the regulatory vacuum are always hesitant to enter the market on a large scale.

Technical Collapse: Double Top Emerges and Leverage Slaughter

Bitcoin three-day chart. Source: TradingView

Under the macro bearish sentiment, Bitcoin's own technical structure has long been hiding a crisis. When the price broke through $123,000 to reach a historical high, the Relative Strength Index (RSI) showed a bearish divergence, indicating a depletion of upward momentum. A more severe signal comes from the three-day chart—Bitcoin has clearly formed a double top pattern, a structure that once triggered a 35% crash in January 2025.

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Psychological game at key support levels

Bitcoin four-hour chart. Source: Cointelegraph

The market structure is playing a life-and-death game at the $117,500 threshold. This key internal liquidity area, closely monitored by technical traders, will trigger a chain reaction of programmed sell orders if it is lost. The emergence of a swing failure pattern on the four-hour chart indicates that the market will enter a high-volatility oscillation phase. Currently, $112,000 has become the dividing line between bulls and bears. If it effectively breaks below, it may trigger a deep correction towards the $105,000-$110,000 area.

Death Spiral of Leverage Liquidation

The most severely affected during the crash were the leveraged long positions. When Bitcoin fell below $117,500, long positions amounting to as much as $880 million were forcibly liquidated within 24 hours, resulting in a tragic "long squeeze." This passive selling dominated by futures contracts further amplified the decline in the spot market, turning the pullback into a mini-crash.

The Calm Paradox of the Derivatives Market

BTC 3-month futures annualized premium. Source: laevitas.ch

In stark contrast to the panic in the spot and futures markets, professional derivatives traders exhibit remarkable calmness. The annualized premium for Bitcoin futures remains stable at 9%, firmly holding in the neutral range of 5%-10%. This indicator proves that the historical highs are not driven by excessive leverage, and professional funds still hold a cautiously optimistic view on the medium-term trend.

The Confidence Code of the Options Market

Deribit Bitcoin 30-day options Delta skew (put-call). Source: laevitas.ch

The real confidence indicator comes from the options market. Despite the price volatility, the 30-day Bitcoin options Delta skew is only 3%, well below the 6% put threshold. This means that institutional investors are not massively buying put options to hedge against risks, and the core market sentiment remains slightly bullish. This divergence in sentiment between professional investors and retail investors reveals the differing judgments of various market participants regarding the nature of the downturn—professional traders see it as a healthy correction, while retail investors fall into panic selling.

Reverse operation of the giant whale

On-chain data has revealed the movements of smart money. Whale addresses holding over 1,000 BTC have accumulated 18,000 bitcoins during the sharp decline, with costs concentrated in the range of $118,000 - $120,000. The reverse positioning of this "smart money" has laid the groundwork for a market rebound.

In-depth analysis of structural contradictions

The recent pullback of Bitcoin has exposed the deep contradictions in its market structure. When the Federal Reserve's meeting minutes signaled a rate cut and the S&P 500 index reached an all-time high, Bitcoin weakened on its own, revealing that its risk asset characteristics still dominate. Despite being bestowed with the title of "digital gold," in actual market fluctuations, Bitcoin often behaves more like a substitute for tech stocks, showing a high correlation with traditional risk assets.

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Lagged effect of liquidity transmission

There is a high correlation of 0.94 between global M2 money supply growth and Bitcoin prices, but the liquidity transmission takes time. When the Federal Reserve reduces quantitative tightening and market liquidity expectations improve, Bitcoin's sensitivity to policy has declined, instead responding more directly to changes in "real interest rates." This change in the monetary transmission mechanism makes Bitcoin more susceptible to short-term sentiment shocks during policy windows.

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Hedging demand in emerging markets

Regional changes worth noting are occurring in the Latin American market. Trump's tariff policies have triggered capital outflows from emerging markets like Brazil and Mexico, leading to a 40% surge in Bitcoin trading volume in these areas. When local fiat currencies face depreciation pressure, Bitcoin's attribute as an "escape tool" becomes prominent, and this structural demand provides invisible support for its price.

This flash crash exposed the vulnerability of Bitcoin as an emerging asset—when inflation data reverses, policy expectations fall short, and technical factors deteriorate, even robust derivatives indicators struggle to withstand the spread of panic. However, the whales quietly act at this moment, absorbing chips at a cost of $105,000 to $108,000, laying the seeds for the next market cycle.

Market attention is now focused on the key support level of $112,000, which not only serves as a watershed for bulls and bears but will also test whether Bitcoin can maintain its narrative as 'digital gold.' As the Federal Reserve's interest rate cut window approaches in September, along with the implementation of regulatory frameworks like the U.S. 'GENIUS Act,' this crash triggered by the specter of inflation may ultimately become a brutal rite of passage for Bitcoin as it matures into a financial asset.