Reversals of fortune are nothing new to die-hard Bitcoin fans – euphoric rallies, then brutal sell-offs. This happens every few years or whenever the feeling collapses.
None of these previous episodes, however, prepared traders for the speed and scale of recent weeks, in a reversal sharper than expected, even if it did not suffer the systemic stress of previous crashes.
Friday’s decline sent Bitcoin to a low of nearly $80,500, putting it on track for its worst month since Terra’s $60 billion collapse in 2022, which triggered the bankruptcies that resulted in FTX. In total, some $500 billion in Bitcoin value was wiped out. And that’s before you count the carnage across the altcoin complex.
Bitcoin is still in good health since President Donald Trump’s victory in November, but much of its popularity disappeared during his first year back in office, a period he hailed as the golden age of crypto. Most losses remain on paper. But for the first time since exchange-traded funds helped bring Wall Street and retail trading into the market, those positions are under pressure.
This time, the spark is harder to spot. These new ETFs did not exist during the last big crypto crash. Investors have withdrawn billions from 12 Bitcoin-related funds this month, according to Bloomberg data, with previous buyers including the Harvard endowment and several hedge funds.
Many digital asset treasury companies — publicly traded crypto holding vehicles inspired by Michael Saylor’s Strategy Inc. — have seen even larger capital outflows as investors question the value of corporate shells built solely to hold tokens.
What is clear is that crypto has become much bigger than retail traders and techno futurists who engage in HODLing against all odds. It is now ingrained into the fabric of Wall Street and the broader public markets, bringing a whole new set of fickle players to the table.
“What has happened in the last two months has been like rocket fuel, as if people were expecting a crash,” said Fadi Aboualfa, head of research at Copper Technologies Ltd. “That’s what institutional investors do. They’re not there to hold, they don’t have that mentality. They rebalance their portfolio.”
Bitcoin remains up about 50% from its pre-election low. And the scale of this decline is still paltry compared to its 75% collapse during the 2021-2022 bear market. This hints at how much deeper the pain could still be. Back then, each milestone revealed another major player – from Celsius to BlockFi to Three Arrows.
Flash crash
But with no obvious outbursts or scandals this time, some traders believe the current decline is more about technical and confidence issues than systemic cracks.
“We are not following the same path; overall macroeconomic conditions, government support and fewer bad actors in the sector are making today’s market more resilient,” said Luke Youngblood, founder of lending platform Moonwell. “The foundations on which crypto is built are stronger, although there are reasons for concern in the long term.”
The most obvious catalyst was the October 10 flash crash, in which $19 billion in crypto bets were liquidated in a matter of hours. The event exposed the chronic lack of liquidity during weekend trading – the flip side of the popular 24/7 trading program – as well as the accumulation of excessive leverage on some exchanges, sending Bitcoin falling from the all-time high of $126,251 it had reached just days earlier.
“To some extent, we believe much of the decline in crypto markets is due to what happened on 10/10,” Brett Knoblauch and Gareth Gacetta, analysts at Cantor Fitzgerald & Co., wrote in a Thursday note. “It feels like some big players in the industry are being forced to sell, because what happened on 10/10 could have had a much bigger impact on balance sheets than initially thought.”
The problem is not yet completely resolved. Liquidity in crypto markets remains low, with market makers weakened by the crash unable to step in and support prices. Around $1.6 billion in bets were liquidated on exchanges on Friday, according to Coinglass data, as the latest drop hit leveraged traders.
The mystique of Bitcoin gold – always very long – has faded. Gold held firm. Crypto remains an indicator of a rapidly contracting risk appetite – and it reacts more quickly than the market around it.
This week, Bitcoin found itself caught in upside trading in tech stocks, with the token’s volatility pointed to as both the cause and effect of the stock market turmoil. On Thursday, for example, the S&P 500 rose early in the day, buoyed by strong earnings from Nvidia Corp., before suffering its biggest intraday reversal since April’s pricing crisis.
Nomura analysts blamed crypto, among other causes. Bill Ackman threw out an unusual link – suggesting that Fannie and Freddie holdings behaved as a crypto proxy.
The fate of crypto is now tied to AI-powered market optimism. With bubbles creating, it won’t take much to entice investors to sell. There are also many dangers lurking within the crypto ecosystem. Saylor’s imitators were built on the belief that a public company that merely holds cryptocurrencies can be worth more than the value of the tokens it holds.
The push to reorient public companies toward crypto treasuries has persisted into the economic downturn so far – echoing the overleveraged lenders of 2022. If confidence cracks, forced sales could follow. Many are already underwater on their symbolic assets.
“When you have a medical device company or a cancer research company that turns into a crypto treasure, that indicates where you are in the cycle,” said Adam Morgan McCarthy, senior research analyst at blockchain data company Kaiko.
Overall, all the positive vibes left in the industry seem to be heading towards the bottom. The Fear and Greed Index – a tool that measures sentiment in crypto markets – settled at a score of 11 out of 100 on Friday, according to CoinMarketCap. We are deep in “extreme fear” territory.
“Fear sentiment has reached relative highs while structural demand for spot remains noticeably absent, leaving the market without the natural buyers typically present during large corrections,” said Chris Newhouse, research director at Ergonia, a firm specializing in decentralized finance.
