Why did Bitcoin plummet today? Fear index crashes to 11, wallet numbers hit a two-year low

December 18, Bitcoin experienced a sharp short-term plunge, temporarily reporting $86,110, marking the third consecutive day below $90,000. The reason for today’s Bitcoin crash points to a triple whammy of negative factors: the Bank of Japan’s expected rate hike to a 30-year high on Friday, potentially unwinding yen arbitrage trading and tightening global liquidity; the Fear and Greed Index plummeting to 11, indicating extreme market panic; and active Bitcoin wallet numbers dropping to a 2023 low, reflecting ongoing liquidity depletion.

Bank of Japan Rate Hike Triggers Liquidity Crisis by Unwinding Arbitrage Trading

The Bank of Japan will conclude a two-day critical policy meeting on Friday, with market expectations of a second rate hike this year. This is the primary trigger for today’s Bitcoin plunge. While this move will keep interest rates low by global standards, it also represents another step toward normalization efforts, possibly meaning that despite political and economic headwinds, borrowing costs will continue to rise until 2026.

Yen “arbitrage trading” is key to understanding this crash. Zhang Lin, head of LBank Labs, explained: “The BOJ’s rate hike quietly normalizes the yen exchange rate, removing the arbitrage trading fuel that has supported global risk assets for years, shifting liquidity from abundant to tight.” In this context, arbitrage trading refers to borrowing yen at near-zero interest rates and investing in much higher-yielding dollar assets, profiting from the interest rate differential between the two countries.

When Japan raises rates, the profit margin of such arbitrage trades shrinks or may even turn negative. More seriously, yen appreciation could force arbitrage traders to close positions, repaying borrowed yen. This closing activity involves selling dollar assets (including stocks, bonds, and cryptocurrencies) to buy back yen, creating a systemic sell-off pressure on global risk assets. Zhang Lin believes this environment “signals a strengthening dollar, stock market volatility, and weakness in the crypto market.”

He pointed out that while this volatility might create some unique opportunities, such as arbitrage between major assets, the broader impact is to suppress speculation. “Raising interest rates will curb speculation; during periods of fiat scarcity, Bitcoin’s scarcity will mask the illusory nature of other cryptocurrencies.” This logic of tightening liquidity perfectly explains why Bitcoin plunged today.

Fear Index Crashes to 11, Active Wallets Hit Two-Year Low

(Source: CryptoQuant)

On-chain data reveal deeper panic beyond price movements. Bitcoin’s Fear and Greed Index plummeted to 11, indicating extreme market panic. This index ranges from 0 to 100, with 0 representing extreme fear and 100 extreme greed. When the index drops below 20, it usually signals an oversold market, but also a collapse in investor confidence. An 11 reading is a rare extreme in recent times, last seen at the market lows of early 2023.

Active Bitcoin wallet numbers have fallen to the lowest level of 2023, indicating that even amid price volatility, market participants engaging in trading are decreasing. This phenomenon is highly unusual; typically, sharp price swings attract speculators, but the current plunge coincides with declining participation, showing a deep erosion of market confidence.

Three On-Chain Warnings for Bitcoin’s Crash Today

· Fear and Greed Index plunges to 11, with extreme panic dominating the market and investors’ risk aversion at peak levels

· Active wallet count drops to 2023 lows, market participation shrinks, liquidity continues to dry up, intensifying price volatility

· Reduced new capital inflows, according to XWIN Research analyst, year-end effects cause both participant and capital declines

XWIN Research’s Japanese analyst states that new capital flowing into Bitcoin has begun to decrease. As year-end approaches, participants and capital typically decline, further reducing market liquidity. “In this environment, due to insufficient liquidity, price movements tend to become more volatile. Meanwhile, reduced noise makes potential supply-demand dynamics clearer.”

Users of Decrypt’s parent company Dastan’s prediction market Myriad believe Bitcoin has a 66% chance of retesting $100,000, slightly lower than the 72% a week ago. This suggests that despite a potentially optimistic outlook, investors remain cautious.

$81,500 Critical Support and $74,000 Final Defense Line

(Source: Trading View)

Crypto analyst Moreno pointed out that Bitcoin’s current price of $86,000 is above the true market average price (TMMP), which represents the on-chain average acquisition price of investors (excluding miners). Moreno predicts that if Bitcoin remains above the TMMP ($81,500), the bull trend will continue strongly. This support level signifies the overall market cost zone; falling below it means most holders are in a loss.

Bitcoin’s weekly chart shows that after multiple failed attempts to break above the $100,000 psychological resistance, the price has shifted from expansion to correction. The price has broken below $100,000 and is now trading below key moving averages, which have started to decline and are acting as dynamic resistance around $103,000 to $108,000.

The MACD indicator still shows a clear bearish trend, with the negative histogram expanding, indicating that although recent selling pressure has eased, downward momentum remains dominant. If the weekly closing price stays below $81,000, the final bull support will be around $74,000, where stronger long-term buyers are expected to emerge.

Conversely, to regain and sustain above $100,000, the market must offset the bearish momentum and open the way toward the $105,000 to $110,000 range. This requires digesting the BOJ rate hike impact, active wallet numbers stabilizing, and the Fear Index rebounding from extreme levels.

Bitwise Chief Investment Officer Matt Hougan believes the global situation is more complex. “Japan’s rate hike (bad for crypto); on the other hand, the US is cutting rates (good for crypto).” He thinks these opposing forces “will ultimately offset each other, and macroeconomic factors will not be the main drivers of crypto’s long-term gains in 2026,” but in the short term, they will “increase market volatility.”

Regarding the expected rate hike on Friday, Hougan said, “The market has already priced this in, so it should have been digested,” but “Japan’s interest rate reaching a 30-year high remains a concerning headline that could bring short-term downward pressure.”