new York
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Even by crypto standards, the last few weeks have been rough.
Investors in digital assets are accustomed to extreme volatility, but a $1 trillion wipeout over the past six weeks has tested even hardcore crypto believers and alienated many of its new converts.
Bitcoin, the industry benchmark, has fallen dramatically since early October, when it hit a record high of $126,000. The world’s most popular cryptocurrency fell below $81,000 on Friday before recovering slightly over the weekend. On Monday, as the broader stock market recovered, bitcoin surpassed $88,000, up nearly 2% over a 24-hour period. (Cryptocurrency markets are open 24 hours a day, seven days a week.)
This is shaping up to be one of the worst months on record for crypto, and it’s unclear whether the market has bottomed out.
“Whether Bitcoin will stabilize after this correction remains unclear,” Deutsche Bank analysts wrote on Monday. “Unlike previous crashes, driven primarily by retail speculation, this year’s downturn has occurred against a backdrop of significant institutional participation, political developments and global macroeconomic trends.”
Although crypto’s fate has largely mirrored that of the stock market in recent years, its current angst runs deeper. This is largely due to an influx of traditional money that behaves very differently from the funds controlled by a typical crypto investor.
Bitcoin is in a bear market, having fallen 30% from its most recent high, while the S&P 500 is only down 3% from its most recent high. It is on track to have its worst month since the crypto “winter” of 2022 which culminated with the collapse of Sam Bankman-Fried’s FTX.
Anxiety is gripping stocks and cryptocurrencies for two main reasons: Investors are worried about the Federal Reserve’s upcoming rate cut, and they are wondering if AI is a bubble that will blow up in their face.
All of this weighs on crypto traders because digital assets, like tech stocks, are particularly sensitive to changes in the Fed’s benchmark rate, which affects the cost of borrowing and can quickly undermine investors’ risk appetite.
But crypto investors have an extra hangover to deal with after the October 10 flash crash. When President Donald Trump restarted his trade war with China that day, it sparked a wave of panic selling that triggered automatic liquidations in the highly leveraged cryptocurrency market. In just one day, the flash crash wiped out $19 billion worth of crypto. For many people, the earth-shattering crash was all the motivation they needed to leave crypto altogether, which makes Bitcoin and other tokens more susceptible to volatility.
The flash crash forced many investors to sell their holdings to meet margin calls. This tends to have a snowball effect: the more bitcoin falls, the more calls investors receive from their brokerages, the more they have to sell their bitcoin (and other holdings) to cover their positions.
What makes this crypto crash different is the presence of billions of dollars that entered the crypto market via Bitcoin spot funds that US regulators approved last year.
Traditional investors got into crypto to profit from the surge, but they don’t have the same level of dedication to the ideology as early adopters who are supported by intense online communities encouraging each other to buy the dip and keep the faith.
“At the end of the day, bitcoin is now standards-only,” Steve Sosnick, chief strategist at Interactive Brokers, told me. “As a result, the standards are going to treat it as another speculative holding in their portfolio… it’s going to be treated like a traditional volatile investment.”
