At the time of publishing this article, the cryptocurrency market is experiencing a significant downturn, with Bitcoin (BTC) falling over 15% from its recent highs, and most altcoins experiencing sharp declines in high double digits. This sudden drop has left many wondering about the reasons behind the market’s crash, how much lower it could go, how soon recovery might begin, and the potential heights it could reach post-recovery.

So why the cryptocurrency market is crashing. The downturn commenced shortly after BTC reached a near all-time high of almost $74,000 last week. Initially, a small correction wasn’t unexpected as BTC often experiences pullbacks after setting new highs, mostly due to long liquidations. For context, long liquidations occur when traders betting on BTC’s price increase are forced to sell their borrowed BTC to cover losses, leading to a sharp price fall, triggering further liquidations.

What was unexpected, however, was BTC’s continued price decline, indicating additional catalysts beyond just trader liquidations. Cryptocurrency prices are influenced by two types of catalysts: crypto-specific factors, like the earlier approval of spot Bitcoin ETFs, and macro factors, such as changes in interest rates. To determine the impact on crypto prices, one can compare BTC’s price movement with major stock indices like the S&P 500 and NASDAQ. Similar price actions suggest macro influences, whereas differing movements indicate crypto-specific factors.

Interestingly, both the S&P 500 and BTC peaked around the same time last week, suggesting that their subsequent crashes were related to unexpected high inflation readings in the U.S. – the CPI and PPI – which hinted at prolonged high interest rates. High interest rates make borrowing more expensive, negatively affecting the economy and stock market. However, if inflation and interest rates were the sole reasons, one would expect a market crash rather than a rally on the day of the CPI announcement.

The real answer might lie in passive flows – the automated buying and selling by pension funds and similar entities. The introduction of spot Bitcoin ETFs allowed BTC to benefit from these passive flows, similar to stocks, explaining the synchronized market rises. However, this doesn’t fully explain the sudden market crash. According to macro analyst, the halt in passive flows, a cyclical phenomenon unrelated to inflation or interest rates, might be the cause.

This leads to the question of when these passive flows will resume, potentially driving BTC and stock prices higher again. The answer appears to be in the next few weeks, though in the meantime, prices could drop further than expected. Additionally, another significant downturn could occur in the second quarter.

In the short term, technical analysis suggests that BTC could see a recovery rally, potentially reaching around $67,000. However, with passive flows not expected to return for a few weeks, a further downturn seems more likely. The Federal Reserve’s upcoming interest rate decision and any crypto-specific developments could influence the market’s direction.

In summary, while the short-term outlook for the crypto market may include further dips and recovery rallies, the longer-term perspective, influenced by passive flows and liquidity, suggests a potential recovery over the summer. This recovery could be amplified by factors such as the Bitcoin halving and political events like the U.S. election, potentially leading to new all-time highs for BTC and altcoins.