Author: The Economist
Compiled by: Deep Tide TechFlow
Deep Tide Introduction: Although Bitcoin's price remains above $70,000, the crypto market is experiencing an unprecedented "lonely winter." This article delves into the differences of this downturn compared to previous ones: the chain reaction of leveraged liquidations, the once highly anticipated ETFs now becoming a driving force for selling, and the most critical factor—the loss of the "Vibe."
As cryptocurrencies transform from a counter-mainstream cool culture into a "mediocre asset" embraced by the elite but not truly accepted by the mainstream financial system, their premium is rapidly eroding.
The author warns that if this unique enthusiasm cannot be reignited, this winter may prove exceptionally long.
Full text below:
A cold wind has swept the U.S. East Coast for weeks, with temperatures in some areas dropping to their lowest in decades. But this pales in comparison to the "deep freeze" investors have pushed crypto assets into. Bitcoin's price has fallen from $124,000 in early October to around $70,000 today, with the total market capitalization of all cryptocurrencies shrinking by over $2 trillion. Although such assets have suffered severe blows before, their supporters now seem more frustrated than ever.
In some ways, the extent of their pain is perplexing. Bitcoin's 45% decline is far from the worst in history: from its peak at the end of 2021, its price once plummeted by 77%. At that time, the crypto industry took about three years to regain its peak market value. The current bear market has only lasted four months.
But look at the performance of other asset classes. In 2022, crypto investors could console themselves because everyone was losing money. That year, the tech-heavy Nasdaq 100 index fell by more than a third from its peak to its bottom. Now, the index is less than 4% away from the all-time high it set just weeks ago (despite the poor performance of some software companies). Crypto fans are sad because they feel alone.
The forces driving such a volatile and speculative market are always shrouded in mystery. However, it is evident that leverage and liquidations are playing a significant role. By the end of September, just before the crash began, the measurable lending volume for crypto assets was approximately $74 billion—more than doubling over the past 12 months and exceeding the level at the end of 2021.
Then, starting on October 10, leveraged positions worth about $19 billion were rapidly liquidated due to massive losses. Since then, a series of smaller positions have been closed one after another. Concerns about Strategy Inc (a company that buys Bitcoin by borrowing and issuing shares) are growing. Its stock price has fallen nearly 70% since July.
The variety of crypto products may have exacerbated this decline. The emergence of crypto exchange-traded funds (ETFs) in 2024 was intended to support prices by expanding the pool of potential buyers. This worked for a while. The iShares Bitcoin Trust ETF (IBIT) became the fastest-growing ETF in history, with assets nearing $100 billion by October. However, ETFs are now pulling prices down. Over the past 80 trading days, IBIT has seen outflows of $3.5 billion—its first sustained selling wave. Most of the funds invested in this ETF are currently at a loss.
The final factor suppressing cryptocurrencies is the hardest to quantify: the "Vibe" is off. For a speculative asset class with no fundamental value or potential to generate returns, the intangible "halo" is everything. And the excitement that once surrounded digital assets seems to have vanished.
Part of the reason is that they have lost their rebellious edge. How "counter-cultural" can an asset class be if the U.S. president and his family are deeply involved in it? Charles Hoskinson, co-founder of the Ethereum blockchain platform, put it bluntly last month: "We've basically become part of the system. And you know what the system does when you become part of it? It makes it uncool."
For some companies, the newly acquired "stodgy" reputation of cryptocurrencies also has its benefits. Institutionalization has helped stablecoin issuers, thereby simplifying digital payments. However, assets like Bitcoin have lost their "cool" appeal while gaining little in return; they appear to be part of the "system" but are not truly adopted by it. Professional, conservative investors still shy away from cryptocurrencies. A Bank of America survey in September showed that the vast majority of fund managers have no exposure to cryptocurrencies at all. Digital assets account for only 0.4% of the total value of respondents' portfolios.
Meanwhile, central banks are buying gold to protect themselves from inflation, geopolitical threats, and sanctions risks. Digital assets, once promised as alternatives to "fiat currency," are now left out in the cold. The Czech National Bank became the first central bank to publicly announce its purchase of cryptocurrencies last year, buying an experimental (and negligible) $1 million worth of Bitcoin. It has not announced any further purchases since.
Digital assets have proven more resilient than many financial columnists (who are always eager to write their obituaries) once suspected. Despite one bear market after another, they have always withstood predictions of total collapse. But there are good reasons to believe that this crypto winter feels exceptionally bitter. Unless the vibe improves, don't expect a thaw anytime soon.
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