Bitcoin plunges in brutal sell-off sparking fears of a wider market downturn

Bitcoin’s biggest daily fall for a month wiped out almost $1bn in leveraged positions, exposing the fragility of corporate crypto strategies.

Almost $US1bn in leveraged positions were wiped out in Monday’s Bitcoin rout alone.

Bitcoin is having a shocker and it might say something about the outlook for stocks.

After recovering above $US93,000 in recent days, the world’s biggest cryptocurrency fell as much as 8 per cent on Monday. It lost 5.1 per cent for the day, the biggest fall in a month and one of the biggest falls this year. Bitcoin is currently nursing a year-to-date loss of about 7 per cent.

That’s a far cry from the heady days of early October when bitcoin hit a record high of $US126,000.

Since then, it’s tumbled 36 per cent in a brutal, six-week fall that ranks as the biggest decline since a 77 per cent plunge between November 2021 and November 2022.

The carnage has been swift and unforgiving. Almost $US1bn in leveraged positions were wiped out in Monday’s rout alone, with bulls bearing the brunt of the pain. Long positions accounted for $US872m of the total liquidations as traders betting on further gains got squeezed.

“This scale of liquidation underscores how thin liquidity and high leverage amplify volatility,” BTC Markets head of finance Charlie Sherry said

Online measures of crypto “fear and greed” remain in “extreme fear” at this point.

It’s an interesting signal for contrarians, but few are willing to catch this falling knife just yet.

The selloff has hit crypto-exposed stocks. Strategy, the company formerly known as MicroStrategy that has become synonymous with corporate bitcoin hoarding, saw its shares tumble. So too did exchange operator Coinbase and other crypto-related names, which fell between 3 and 5 per cent.

What makes this downturn particularly interesting is what it reveals about the fragility of bitcoin’s latest business model: the corporate treasury play.

Strategy, which has about 650,000 bitcoin worth about $US56bn, has led this strategy.

It’s been buying bitcoin aggressively by selling shares and raising debt, betting that the value of its crypto holdings will outpace the dilution to existing shareholders.

But that strategy is under severe strain. The company’s mNAV, a key metric that compares its enterprise value to the value of its bitcoin stash, has fallen to about 1.17. If it drops below 1, Strategy’s chief executive Phong Le has suggested the company may have to sell some bitcoin.

“We can sell bitcoin and we would sell bitcoin if we needed to fund our dividend payments below 1x mNAV,” Le said on a podcast last week, adding it would only be a last resort.

To ease immediate concerns, Strategy announced on Monday it had created a $US1.4bn reserve from share sales to cover at least 21 months of dividend and interest payments.

It also bought another 130 bitcoin, trying to signal business as usual.

But investors weren’t convinced.

Strategy’s shares are now down about 65 per cent from their November 2024 peak.

Analysts at JPMorgan have warned the company could be dropped from major indices, triggering billions in outflows from passive funds.

The “crypto winter” is also hurting sentiment around US spot bitcoin exchange-traded funds.

These products, which launched with great fanfare in January 2024, have suffered roughly $US4.6bn in outflows over the past month. The iShares Bitcoin Trust has seen withdrawals for five straight weeks, its longest losing streak since launch.

“Sentiment remains fragile, with traders staying cautious amid persistently soft demand for US spot crypto ETFs, signalling a slowdown in institutional participation,” Moomoo Australia dealing manager Jimmy Tran said.

But the confounding thing is that the backdrop for bitcoin should actually be pretty favourable.

Unlike the 2021-22 crypto winter, when the US Federal Reserve was jacking up rates aggressively to fight inflation, this time around central banks are cutting. The market is pricing in another US rate cut next week and about 88 basis points of cuts over the next 12 months.

Lower rates typically support non-yielding, speculative assets like bitcoin.

Add in the Trump administration’s promise of a crypto-friendly regulatory environment, strong hints of an ultra-dovish replacement for Fed chair Jerome Powell and the possibility of eventual quantitative easing as the US wants to cut rates but also get bond yields down at a time when the economy is doing okay and inflation is sticky, and you’d think bitcoin bulls would be celebrating.

Instead, they’re licking their wounds.

IG market analyst Tony Sycamore said he saw potential for another leg up if bitcoin holds above key support at $US80,537, with Liberation Day lows around $US74,000 to $US75,000 providing a safety net.

He’s looking for a possible move towards $US95,000 to $US100,000.

But others are more pessimistic. Patrick Horsman, chief investment officer at crypto firm BNB Plus, told The Wall Street Journal he thought bitcoin could fall as low as $US60,000.

In the bigger picture, bitcoin is closely tightly linked to risk appetite across markets, particularly technology stocks. When the Nasdaq fell 38 per cent between 2021 and 2022, bitcoin dived 77 per cent. In the October-November selloff, the Nasdaq fell 9 per cent while bitcoin tumbled 36 per cent.

The question now is whether bitcoin is acting as a canary in the coal mine for a broader stock market downturn, or whether it’s simply going through another of its regular boom-bust cycles.

History suggests bitcoin bulls shouldn’t lose hope entirely. The crypto has recovered from similar percentage declines before, often reaching new highs within months. But with leverage flushed from the system and institutional appetite waning, any rebound may take longer this time.

For now, the crypto faithful are learning an old lesson: what goes up can come down just as fast.

Originally published as Bitcoin plunges in brutal sell-off sparking fears of a wider market downturn