The crypto market cleared 2 trillion D: what history says and what is expected next

The other digital currencies also experienced a dive at similar rates. Thus, Ethereum fell by 11% to a price of 1935 dollars per coin, completing a 31% collapse in just the last week. Binance also plunges by 10%, Ripple by 22% and Solna by 13%.

How much money has been deleted from crypto?

Since peaking in October, the crypto market has lost an astronomical amount of nearly $2.2 trillion in market capitalization. In the last month alone, it has lost $940 billion of its value. Those who pay the price are also the shares of the crypto companies, such as Michael Saylor’s Strategy or Coinbase, completing falls of 70% and 50% during the last six months.

It should be said that the behavior of the crypto market is particularly surprising. Apparently, he was supposed to benefit from all the geopolitical uncertainty, such as the possibility of a US-Iran war and the capture of Venezuelan President Maduro, or economic issues such as Trump’s threats to occupy Greenland and his struggles with European countries and the trade war. If it is the fear of high pricing in the markets, if it is the continuation of the run of artificial intelligence, and even the fall this week in software stocks. But instead of rising – as happened to gold until recently – Cryptocurrencies are actually losing ground.

Why is this happening?

The falls in the crypto market do not happen in a vacuum. Even in the American stock market, which is in the range of high prices, the nervousness of investors is evident and every stock that disappoints is a “hijacker”. This happened last week after reports Microsoft and this week after the chip company reports AMD and the technology giant Alphabetical (Google) . At the same time, the prices of the gold and silver metals, which had soared sharply until recently, have completed a tens of percent drop in value in recent days.

As for the crypto market, different explanations are given in the market. CryptoQuant claimed that “institutional demand has fundamentally reversed”. According to them, US ETFs, which bought 46,000 bitcoins at this time last year, will be “net sellers” in 2026. According to their report, “Bitcoin has broken below its 365-day moving average for the first time since March 2022 and is down 23% in the 83 days since the crash – worse than the bear phase of early 2022.” It refers to the attempt of technical analysts to determine the direction of the trend of an asset over time. Its breakage is considered a bad sign.

Another option noted in the market is “forced liquidations” – following robots or automated trading orders, when a certain price threshold is crossed, investors sell their position automatically. According to Manuel Villegas Franceschi of Julius Barr, “Crypto demand waned rapidly toward the end of last week, leading to net outflows of nearly $2 billion from American ETFs to Bitcoin. The complementary move to the declines came from the direction of the stablecoins. We estimate that redemptions totaling more than $4 billion were recorded in the main stablecoins.”

According to him, there was essentially a domino effect of leverage. “Leveraged long positions were eliminated on a large scale, with last Saturday marking the highest number of eliminations since the crisis in October, with over 300,000 positions.” The result is that when the price started to fall, positions were automatically closed, leading to more selling in the market. Franceschi adds that “the most prominent factor is that this occurred in the month characterized by the lowest trading volumes in Bitcoin and Ethereum futures in over a year. The economic fundamentals of crypto are far from being a bright spot. Instead of being used as a protective asset during times of pressure in the markets, Bitcoin reacted like a distinct risk asset, with a particularly high sensitivity to movements in the stock markets.”

As mentioned, crypto is not alone. What started the recent drama in the markets and the move away from risk assets, is the election of Kevin Warsh as the chairman of the Fed. Warsh is considered to be opposed to the high balance sheet of the American Fed, so he is expected to lead a policy of monetary restraint, meaning less money in the markets. Asset prices such as crypto, stocks and real estate, soared throughout the years of zero interest rates because there was “too much money” in the economy. Diluting money in the market is expected to return investors to more solid assets and not require them to look for returns in exotic assets.

What does history say?

Unlike the stock market, where a 30% drop from the peak is no less than a historic event, when it comes to Bitcoin it is almost commonplace. In the last decade alone, we saw no less than 7 times that the currency plunged by 30% or more, two of which happened just last year. The bad news: in these seven times, the average drop was about 50%. The good news: in the year following those falls, in most cases, the decentralized currency soared by triple-digit rates, and once by more than 1,000%.

Despite all those falls along the way, some of them at rates of about 80% or more, the currency has so far managed to recover even from the biggest drops (except for the last one of course, at least for now). For example, 2022 was one of the worst years the crypto market has known. A series of decentralized currencies collapsed, along with funds and banks that operated in the field. The storm reached its peak with the explosion of the Sam Bankman Fried affair at the end of that year, who was later convicted of defrauding investors, money laundering and criminal ties. The crypto exchange led by Bankman Fried, FTX, which was one of the largest in the world, collapsed at the time.

Bitcoin erased about 77% of its last peak in those days, and traded around low levels ($16.5 thousand) for months. The market has already announced the death of the decentralized currency. But since then, Bitcoin has already recovered 250% – including the current crash.

What is expected to continue?

The famous investor Michael Berry, who predicted the subprime crisis in the US (but since then, has managed to issue a number of wrong predictions) said that Bitcoin is a purely speculative asset, which failed to truly become a way to hedge risks, unlike metals (such as gold). In this respect, he is right: the crypto market has behaved in recent years like a leveraged option on the stock market – and falls much more than the market itself in times of crisis. So, for example, In the declines of 2022, Bitcoin plunged 70%, while the US S&P 500 fell only about 20%.

The CNBC website quoted Marion Labor, an analyst at Deutsche Bank, who wrote last night to clients that “in our opinion, this constant sell-off signals that traditional investors are losing interest, and the general pessimism about crypto is increasing.” John Blank, chief strategist at Zacks Investment Research, estimates that Bitcoin is still capable of falling to a level of even $40,000 per coin, and that the “crypto winter” may continue for months.

Reuters quoted Nick Pokrin, an investment analyst and co-founder of Coin Bureau, who claimed that “it is clear that the crypto market is now in full surrender mode”, adding that “if previous cycles are anything to go by, this is no longer a short-term correction, but a transition from distribution to reset – and these usually take months, not weeks”.

In an interview with CNBC, Maya Winovich, CEO of Digital Assets at FG Nexus, said that “the bull run in a straight line that many people expected has not really materialized yet. Bitcoin is no longer traded on the basis of ‘hype’, the story has lost some of that plot, it is traded on the basis of pure liquidity and capital flow.”

Franceschi Miulius Barr estimates that “crypto will remain particularly sensitive to the super factors that currently dictate the financial markets. Decreases in the US stock markets are expected to lead to a similar result in crypto prices in the short term. We recommend caution in trying to pursue a reversion to the mean in the crypto market, as their economic fundamentals have been largely shaken and the macroeconomic environment remains complex.”

Whereas at the Oppenheimer Investment House they suggest looking at a longer term. In their opinion, “the digital asset industry is in the midst of a maturing process. The transition from a speculative and isolated system to a financial infrastructure backed by federal legislation in the US and uniform European regulation, sharpens that the industry is here to stay […] The structure of the industry is now designed to allow the entry of institutional capital […] Over time, we anticipate a broad trend of blurring the boundaries between the world of crypto and the world of traditional finance. This trend is no longer theoretical. The recent announcements by the JP Morgan bank, which plans to allow the use of crypto-assets as collateral in institutional activity and commercial financing, and the payment network Zelle, which is examining the integration of stable currencies in its international transfer system, illustrate how blockchain technology penetrates into the heart of the traditional financial system. This penetration is expected to bring about a profound change in the structure of operational efficiency, with a shortening of clearing times, lower costs, and an improvement in transparency and liquidity management.”