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Here Are All the Reasons Why Bitcoin Has Plunged From a Record
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Here Are All the Reasons Why Bitcoin Has Plunged From a Record
Muyao Shen, Suvashree Ghosh and Isabelle Lee
5 min read
(Bloomberg) -- Attempts to decipher exactly what’s driving the price of Bitcoin are often tricky endeavors, with multiple offsetting catalysts in the mix.
That seems to be the case these days, as market observers try to unpack the reasons behind a slide that’s dragged the original cryptocurrency down by as much 28% from its record of more than $109,000 on Jan. 20, the day that crypto supporter Donald Trump was inaugurated as president of the US.
Below are the most commonly cited reasons for the drop:
Macroeconomic Concerns
Bitcoin isn’t the only asset that’s fallen in recent weeks. The US stock market has also experienced a dip that’s pushed the Nasdaq 100 Index down about 7% from its last record on Feb. 19. Bitcoin is often viewed as a “high beta” asset, meaning when stocks move in one direction, the largest crypto token often will move even more in the same direction.
The dip in stocks, and a concurring rally in US Treasuries, has been attributed to concerns about the potential economic effects of Trump’s plans to impose further tariffs on trading partners.
“This tanking can be viewed as a response to macro fears on Trump’s tariffs and geopolitical uncertainty,” Caroline Bowler, chief executive officer of BTC Markets, said of the recent drop in crypto prices.
The Biggest Hack Ever
The losses that took Bitcoin and the second-biggest cryptocurrency, Ether, to multi-month lows this week occurred after the Feb. 21 hack of the Bybit exchange. The attack, which has been widely blamed on North Korea’s Lazarus Group, drained almost $1.5 billion from the exchange.
Not only was it the worst theft ever in the history of crypto, it also shocked market participants because it targeted a type of crypto custody known as a “cold wallet” that had been considered highly safe because it involves hardware not connected to the internet.
“Confidence got shaken after the hack of $1.5 billion, which is quite a bit of money,” said Zaheer Ebtikar, co-founder of crypto fund Split Capital. “I’m sure there are some people who are just kind of like: ‘You know what? Maybe I can wait it out a little bit more.”
ETF Outflows
To be sure, there is a bit of tautology involved when connecting flows in and out of spot-Bitcoin exchange-traded funds and the price of the cryptocurrency since both may be happening for similar reasons.
Yet there’s an echo effect in play. As Bitcoin’s price goes down, investors naturally pull money from the ETFs tracking the asset. Then when those outflows are recorded, the signal being sent from the ETF market may cause crypto traders to sell more Bitcoin.
The slump in Bitcoin in February corresponded with the largest monthly net outflow for the group of spot-Bitcoin ETFs since they were launched in January 2024, with an exodus of about $3.3 billion, according to data compiled by Bloomberg.
“Hot money that chases Bitcoin, or any speculative trade, flows out as fast as it entered when prices start falling,” said Michael Rosen, chief investment officer at Angeles Investments.
‘Cash and Carry’ aka Basis Trades
Ebtikar and others said they believe that an unwind of what’s known in crypto as the “cash and carry trade” also played a role in the selloff. The trade, which is similar to what’s known as the basis trade in traditional markets, is a way to profit from pricing discrepancies between spot and futures markets.
If prices in futures markets are trading higher than spot prices, a trader can sell futures and buy spot Bitcoin and profit on the difference. Yet futures traders on the CME and elsewhere remain defensive, with low Bitcoin futures premiums on the exchange. Annualized March premiums fell to 5.7%, with the daily next-month premium dropping to lows not seen since last July, according to a Feb 25 report by K33 Research.
The ETF outflows in the US were “driven mostly by arbitrage players like hedge funds playing a basis trade via futures and/or options,” said Mark Connors, founder and chief investment strategist at Risk Dimensions. “Of course, there is the outright seller. But we see the majority from profitable arb opportunities that spiked in this most recent downturn.”
Trump Trade Unwind
Prices of many of the assets that investors believed would benefit from Trump’s return to the White House have declined in recent weeks. Bitcoin was arguably the top “Trump trade,” given how vocally he supported the industry on the campaign trail. While the Securities and Exchange Commission has dropped many lawsuits and investigations into crypto companies in Trump’s first few weeks in office, progress on further support has been slow, at least in the eyes of some traders.
Trump vowed to create what he called a strategic national stockpile of Bitcoin while on the campaign trail, starting with tokens already held by the US government following asset seizures. His Republican ally, Senator Cynthia Lummis of Wyoming, followed up with a bill requiring the government to make purchases to build a stockpile of up to 1 million Bitcoin over five years. Yet not much has been said about the plan since, and Lummis’s bill has not picked up much support in Congress. Trump’s executive order in support of the industry called for studying a digital-asset stockpile, falling short of a promise to create a Bitcoin reserve.
“What’s been driving this is the lack of positive executive-order news some pundits were expecting, and US inflation numbers,” said Paul Howard, senior director at market maker Wincent.
Lummis suggested on Friday that progress on the Bitcoin-stockpile proposal is likely to take longer than many crypto advocates would like and that “my bets are that you’ll see a state have a Bitcoin strategic reserve before the federal government.”
The outlook there isn’t so great either: Lawmakers in Montana, North Dakota, South Dakota and Wyoming have all voted against establishing state-level crypto reserves in the last few weeks, citing concerns over risk and volatility associated with digital assets.
--With assistance from Sidhartha Shukla and David Pan.
