Reasons behind Bitcoin’s record plunge
The recent downturn in the price of Bitcoin has left many market analysts puzzled as they attempt to dissect the various factors contributing to its decline. From hitting a record high of over US$109,000 on January 20th, which coincided with the inauguration of pro-crypto advocate Donald Trump as US president, the leading cryptocurrency has plummeted by as much as 28%. Amidst this turbulent period, several key reasons have emerged as potential drivers of Bitcoin’s slump.
One significant contributing factor to Bitcoin’s decline is the broader macroeconomic landscape. Bitcoin, known for its high beta nature, often reacts more strongly to market movements compared to traditional assets like stocks. The recent dip in the US stock market, prompted by concerns over Trump’s proposed tariffs on trading partners, has spilled over into the crypto sphere. The ripple effect of macroeconomic uncertainties has cast a shadow over Bitcoin’s performance.
Additionally, a major hack targeting the Bybit exchange on February 21st sent shockwaves through the cryptocurrency market. The staggering theft of nearly US$1.5 billion, allegedly orchestrated by North Korea’s Lazarus Group, exploited vulnerabilities in a supposedly secure “cold wallet.” This unprecedented breach not only eroded confidence in the safety of crypto custody but also prompted investors to reassess their risk appetite in the volatile crypto space.
Moreover, the outflows from spot-Bitcoin exchange-traded funds (ETFs) have exacerbated Bitcoin’s downward trend. As prices have declined, investors have withdrawn significant amounts from ETFs tracking Bitcoin, triggering a negative feedback loop that amplifies selling pressure. This trend was underscored by the largest monthly net outflow of around US$3.3 billion from spot-Bitcoin ETFs since their inception, reflecting shifting sentiment among market participants.
Furthermore, the unwinding of the “cash and carry trade,” a popular arbitrage strategy in crypto markets, has played a role in the recent selloff. This trade, similar to traditional basis trades, exploits pricing differentials between futures and spot markets. However, subdued futures premiums and tepid interest from futures traders have dampened the attractiveness of this trading strategy, adding to the selling pressure on Bitcoin.
Lastly, the fading optimism surrounding Bitcoin as a “Trump trade” has further fueled its decline. Despite Trump’s vocal support for the crypto industry, progress on key initiatives, such as creating a national stockpile of Bitcoin, has been slow. The lack of concrete actions from the Trump administration, combined with concerns over inflation and regulatory uncertainties, has dampened investor sentiment towards Bitcoin as a favored asset under a Trump presidency.
In conclusion, Bitcoin’s recent price decline can be attributed to a convergence of macroeconomic, security, and regulatory factors that have cast a cloud over the once-thriving cryptocurrency market. As market observers struggle to decipher the complex web of catalysts impacting Bitcoin’s trajectory, the resilience of the world’s largest cryptocurrency is put to the test in the face of mounting challenges.
