Reversals of fortune are nothing new for Bitcoin die-hards — an ecstatic rally followed by a brutal sell-off. This happens every few years, or whenever an emotional breakdown occurs.
However, none of these previous events prepared traders for the speed and scale of the past few weeks, with the reversal being more dramatic than expected even without the systemic pressure of previous crashes.
Friday’s losses sent Bitcoin to lows near $80,500, putting it on track for its worst month since Terra’s $60 billion collapse 2022 triggered the bankruptcy of FTX. In total, about five trillion dollars in Bitcoin value has been wiped out. And that’s before counting the carnage in the altcoin complex.
Bitcoin is still comfortably rising since President Donald Trump’s victory in November, but much of the heady gains have faded during his first year back in office, a period that was hailed as the golden age of cryptocurrencies. Much of the damage remains on paper. But for the first time since exchange-traded funds helped Wall Street and retail enter the market, those positions are under pressure.
This time the spark was harder to spot. These new ETFs didn’t exist during the last crypto crash. Bloomberg data shows investors have pulled billions of dollars from 12 Bitcoin-related funds this month, with past buyers including the Harvard endowment and several hedge funds.
A slew of digital asset finance firms — publicly traded cryptocurrency holding vehicles inspired by Michael Thaler Strategies — have seen deeper outflows as investors question the value of corporate shells set up specifically to hold tokens.
What’s clear is that cryptocurrencies have become bigger than retail traders and techno-futurists who are committed to holding on no matter what. It is now woven into the fabric of Wall Street and the broader public markets, bringing with it a whole new set of discerning players.
“What happened in the last two months was like rocket fuel, as if people expected it to crash. That’s what institutional investors do. They don’t hold, they don’t have that mentality. They rebalance their portfolios,” said Fadi Aboualfa, head of research at Copper Technologies Ltd.
Bitcoin is still up about 50% from its pre-election lows. The size of this pullback still pales in comparison to the 75% plunge during the 2021-2022 bear market. This hints at how deep the pain will continue. At the time, each leg that fell exposed another major player—from Celsius to BlockFi to Three Arrows.
flash crash
But with no apparent explosions or scandals this time around, some traders believe the current decline is more a result of technicals and confidence than systemic cracks.
“We are not on the same path; the overall macro environment, government support and the reduction of bad actors in the space make the market more resilient today,” said Luke Youngblood, founder of lending platform Moonwell. “Even if there is reason for concern in the future, the foundations that cryptocurrencies have built are stronger.”
The most obvious catalyst was the flash crash on October 10, which saw $19 billion worth of cryptocurrency bets liquidated within hours. The incident exposed a chronic lack of liquidity during weekend trading – as opposed to the cryptocurrency’s famous 24-7 trading schedule – and excessive leverage on some exchanges, causing Bitcoin to retreat from the all-time high of $126,251 reached just days ago.
“To some extent, we believe much of the decline in the cryptocurrency market is due to what happened on October 10th,” Cantor Fitzgerald & Co. analysts Brett Knoblauch and Gareth Gacetta wrote in a report Thursday. “It feels as though some of the larger players in the space were forced to sell, as what happened on 10/10 may have had a much greater impact on balance sheets than initially thought.”
The problem hasn’t completely gone away. Cryptocurrency market liquidity remains low, market makers weakened by crash Unable to intervene And support the price. About $1.6 billion in bets were liquidated on exchanges on Friday as the latest decline hit leveraged traders, according to Coinglass.
Bitcoin’s gold-like mystique — which was always a big stretch — has disappeared. Gold holds its ground. Cryptocurrencies continue to be the epitome of rapidly fluctuating risk appetite – and it can react faster than surrounding markets.
Bitcoin has been caught up in chaotic trading among tech stocks this week, with the token’s volatility cited as both a cause and effect of the stock market turmoil. On Thursday, for example, the S&P 500 rose earlier in the day on strong earnings NVIDIA companies, before taking the biggest hit intraday reversal since the tariff storm in April.
Analysts at Nomura Securities blamed cryptocurrencies, among other reasons. Bill Ackman proposes an unusual link — suggesting that Fannie Mae and Freddie Mac Holdings behave like a crypto proxy.
The fortunes of cryptocurrencies are now tied to market optimism fueled by artificial intelligence. As the bubble continues to grow, investors quickly sell off the stock. There are many dangers lurking in the crypto ecosystem. Saylor’s imitators believe that a publicly traded company that only holds cryptocurrency could be worth more than the tokens it holds.
Efforts to reposition public companies as cryptocurrency vaults amid the economic downturn have continued to this point, echoing over-leveraged lenders in 2022. If confidence collapses, forced selling could occur. Many are already underwater The tokens they hold.
“When a medical device company or a cancer research company rebrands as a cryptocurrency vault, that’s a sign of the cycle you’re in,” said Adam Morgan McCarthy, senior research analyst at blockchain data firm Kaiko.
Overall, any remaining positive sentiment in the sector appears to be heading for the bottom. The Fear & Greed Index, a tool that measures cryptocurrency market sentiment, had a score of 11 out of 100 on Friday, according to CoinMarketCap. This is already in the category of “extreme fear”.
Chris Newhouse, director of research at Ergonia, a company specializing in decentralized finance, said: “Fear has surged to relatively high levels, while structural demand for spot remains significantly missing, resulting in a market lacking the natural buyers that typically emerge during major corrections.”