Why Is Bitcoin Crashing?
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To investors,
Bitcoin is crashing and investors are freaking out. The asset is down 5% in the last 24 hours, down 20% in the last week, and down 30% in the last month. As if that wasn’t bad enough, bitcoin hit $60,000 last night which means the digital asset had fallen more than 50% from the latest all-time high price of $126,000.
Raoul Pal pointed out the fear and greed index was sitting at 5 out of 100 yesterday. I don’t think I have ever seen the metric come in that low.
Bitcoin Archive shows the 4-week RSI has only been lower once in the history of bitcoin.
So why is bitcoin falling?
That seems to be the trillion dollar question. The easy answer, of course, is there are more sellers than buyers, but that doesn’t satisfy the millions of bitcoin holders who were looking for hyperbitcoinization or the 6-figure price predictions from their favorite social media influencer.
The truth is that bitcoin is selling off for a variety of reasons. First, there was a psychological milestone at $100,000 that seems to have unlocked sellers of bitcoin that had held the asset for a long time. The adoption of bitcoin by Wall Street giants like Blackrock and Fidelity may have signaled bitcoin’s conquest was achieved in the mind of early cypherpunks and bitcoin believers.
The second reason is that bitcoin has become highly financialized compared to its previous state as a spot asset that investors could simply buy and hold. I will share more on this in a minute.
The third reason is the four-year cycle has been a concept in bitcoiner’s minds for more than a decade. Whether it is real or not, many holders were prepared to sell their bitcoin about 18 months after the halving with the hopes of buying more bitcoin back later at lower prices. Anticipation creates action and actions create reality.
And lastly, bitcoin is a forward-looking market. When investors believed inflation was on the horizon in 2020, they rushed to buy bitcoin in advance, which led to a 600% increase in the asset price. Now that deflation is a bigger risk than inflation, I believe a portion of investors realized that bitcoin (an inflation-hedge asset) should sell-off when that deflation becomes obvious to everyone.
So there is not one single reason you can point to as the culprit of the recent drop in price for bitcoin. But I want to dig a little deeper on the idea of bitcoin as a financialized asset.
The first aspect of this story is the increased ways to gain exposure to bitcoin. Many bitcoiners incorrectly believe that scarcity has been negated in bitcoin because of these new instruments. For example, here is a post from a popular account that has racked up 2 million views since yesterday:
“The moment supply can be synthetically created, scarcity is gone. And when scarcity is gone, price stops being discovered on-chain and starts being set in derivatives. That is exactly what happened to Bitcoin. And it’s the same structural break that already happened to gold, silver, oil, and equities.
Once derivatives took over the original Bitcoin thesis is broken. Bitcoin’s valuation was built on two ideas: a hard cap of 21 million and no rehypothecation. That framework died the moment Wall Street layered this on top of the chain:
→ Cash-settled futures
→ Perpetual swaps
→ Options
→ ETFs
→ Prime broker lending
→ Wrapped BTC
→ Total return swaps
From that point forward Bitcoin supply became theoretically INFINITE. Not on-chain. But in price discovery, which is what actually matters. Synthetic Float Ratio (SFR). The metric that explains everything. Once synthetic supply overwhelms real supply, price no longer responds to demand.
It responds to positioning, hedging, and liquidation flows. Wall Street can now trade against Bitcoin. They’re not guessing direction. They’re doing what they do in every derivatives-dominated market: Create unlimited paper BTC. Short into rallies. Force liquidations. Cover lower. Repeat.
This isn’t “betting.” It’s inventory manufacturing. One real BTC can now simultaneously back an ETF share, a futures contract, a perpetual swap, an options delta, a broker loan, and a structured note. All at THE SAME TIME. That’s six claims on one coin. That is not a free market. That is a fractional-reserve price system wearing a Bitcoin mask. Ignore it if you want, but don’t pretend you weren’t warned.”
That sounds really bad and scary, right? Well, like all good conspiracy theories, it only has a hint of truth to it. There has been no change to the scarcity of bitcoin. There will only ever be 21 million coins. The monetary policy is not changing, neither is the total supply.
However, it is true that the increased financial instruments give sophisticated investors more tools to express their view in the market or to manipulate the price in a given direction. So don’t believe the doomsday prediction of synthetic bitcoin supply, but understand that market dynamics have fundamentally changed. There are new players with new tools and a very different approach than the hardcore believers of the past.
The second theory related to financialization is that the increased participation in bitcoin ETFs could be behind the recent sell-off. TheOtherParker explains it well when writing:
“This was the highest volume day on $IBIT, ever, by a factor of nearly 2x, trading $10.7B today. Additionally, roughly $900M in options premiums were traded today, also the highest ever for IBIT. Given these facts and the way $BTC and $SOL traded down in lockstep today (normally SOL trades with beta) + the relatively lower liquidations on CeFi exchanges, this leads me to believe that the nexus of the problem lies with a large IBIT holder. IBIT has become the #1 venue for BTC options trading, so my guess is that a hedge fund trading IBIT options is the culprit.
If you look at the 13F filings for IBIT, you’ll find a number of interesting names that have the majority of their fund in IBIT. In fact, there are a few in there (not naming names) that have 100% of their fund in IBIT, which likely means no cross margin. In fact, the biggest reason to set up a fund to hold a single asset would be to isolate margin, so that if the trade blew up, the brokers wouldn’t have claim to any other assets.
Interestingly, most of these giant, single asset funds are based in HK. We know that Asian traders, particularly in China, have been deeply involved in the Silver and Gold trade. Silver was down 20% today, which was the 2nd largest 1 day move in a very long time (largest on Jan 30). We also know that the JPY carry trade has been unwinding at an increasingly rapid pace.
This leads me to think that the culprit for the IBIT blowup today was 1 or more HK-based non-crypto hedge funds. As @FranklinBi pointed out, the fund(s) being non-crypto would explain why no one sniffed them out. They would likely have few/no crypto counterparties, meaning complete isolation from CT.
The last small piece of evidence I have is that I personally know a number of HK-based hedge funds that are holders of $DFDV, which had the worst single down day ever, with a meaningful mNAV decline. The mNAV had been holding steady surprisingly well throughout this pull back until today. One of these fund(s) could have been connected to the IBIT culprit, as I highly doubt a fund taking that large of a position in IBIT and using a single entity structure would only have the one fund.
Now, I could easily see how the fund(s) could have been running a levered options trade on IBIT (think way OTM calls = ultra high gamma) with borrowed capital in JPY. Oct 10th could very well have blown a hole in their balance sheet, that they tried to win back by adding leverage waiting for the “obvious” rebound. As that led to increased losses, coupled with increased funding costs in JPY, I could see how the fund(s) would have gotten more desperate and hopped on the Silver trade. When that blew up, things got dire and this last push in BTC finished them off.”
This theory of IBIT holders being caught offsides doesn’t seem crazy to me. Is it the reason for bitcoin’s 50% decline in the last 4-5 months, definitely not. Could it have exasperated the situation, especially yesterday when there was such a severe sell-off? Absolutely.
Forced sellers tend to make assets do volatile things. And to say yesterday was volatile would be an understatement.
The good news is that bitcoin’s recent sell-off is not nearly as bad as past bear markets. Pierre Rochard points out this is the least worst bitcoin “bear market.”
Bitcoiners were built for this type of chaos in markets. They have held the asset through many 50%+ drawdowns. In fact, bitcoiners have experienced a 50% drawdown in the asset approximately every 18 months for the last decade.
That is a Global Financial Crisis every year and a half. Not bad for a bunch of people on the internet with a crazy dream to reimagine the monetary system.
Have a great weekend. I will talk to everyone on Monday.
- Anthony J. Pompliano
Founder & CEO, Professional Capital Management
Why The Bitcoin Narrative Is Shifting Right Now with ProCap Financial CIO Jeff Park
Jeff Park is a Partner & Chief Investment Officer at ProCap Financial. In this conversation, we discuss bitcoin’s recent drawdown and whether the market is in a true bear phase, the current interest rate backdrop, and the Fed’s role in today’s economy.
We also cover the nomination of Kevin Warsh as Fed chairman, Jeff’s outlook on precious metals, and a warning on one asset he believes investors should avoid going forward.
Enjoy!
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exacerbated not exasperated ...
You never really addressed this other than to say 'there are only 21m coins'. Which is NOT what the poster you quoted was saying at all.
He said:
This isn’t “betting.” It’s inventory manufacturing. One real BTC can now simultaneously back an ETF share, a futures contract, a perpetual swap, an options delta, a broker loan, and a structured note. All at THE SAME TIME. That’s six claims on one coin. That is not a free market.