Crypto's Hard-Won Acceptance Now Fuels Its Market Decline
Global cryptocurrency achieved everything it once dreamed of. Now, that very success is causing its decline. Bitcoin, the most popular digital coin, has firmly embedded itself into the world's financial system faster than any other asset in history. From being mocked by mainstream finance and facing harsh regulatory crackdowns just years ago, crypto now enjoys broad acceptance and even encouragement.
Major banks and asset managers actively launch crypto products. The latest wave of American regulators openly express enthusiasm for digital assets. In October, bitcoin's total market value reached an astonishing peak of $2.5 trillion. Yet, paradoxically, these victories have created serious problems for the entire crypto industry.
The Price Plunge and Missing Narrative
Prices have tumbled dramatically. Bitcoin dropped from its all-time high of around $126,000 in early October to just above $92,000 recently. For a purely speculative asset that generates no income and relies entirely on hopes for future price increases, this presents a fundamental challenge. The industry lacks a fresh, bullish story to justify further gains.
Every significant crypto rally in recent years followed a clear pattern. Each exciting upswing tied directly to optimistic narratives about greater acceptance. The lockdowns and fiscal stimulus of 2020-2021 coincided with mainstream brokers offering crypto trading. Late 2023 brought hopes for crypto exchange-traded funds, which materialized when American regulators approved the first ETF applications in January 2024. Donald Trump's election victory in November 2024 gave bitcoin another substantial boost.
Today, investors face no difficulty accessing bitcoin. Brokers provide a range of crypto assets to anyone with a smartphone. Some large investors remain cautious, though. Crypto enthusiasts recently celebrated news that the Czech central bank purchased $1 million in bitcoin and other cryptocurrencies. However, that amount represents just a tiny fraction of the bank's $171 billion reserves. Most central banks still completely exclude digital assets from their defensive holdings.
Wider Financial System Now Faces Crypto Risks
The other consequence of crypto's victory is that pain from a market crash will spread much wider than before. Investors most exposed to the recent slump behaved as if the boom would never end. Strategy, a software company that transformed into mainly a leveraged bet on bitcoin, borrowed heavily to accumulate about $60 billion worth of the cryptocurrency. The firm's market capitalization now sits below the value of its bitcoin holdings, raising serious concerns about potential fire-sales.
This company isn't the only source of risk in the digital-asset universe. On October 10th, approximately $19 billion in leveraged crypto positions vanished after Mr. Trump announced fresh 100% tariffs on China. The tariffs were withdrawn a few days later, but the damage was done. Nobody knows exactly how much leverage remains in the system, but further price declines increase the risk of serial blow-ups dramatically.
The biggest risk involves miserable cryptocurrency sentiment spreading to other markets. Since 2020, bitcoin has shown stronger correlation with technology stocks. These stocks could fall further if flighty crypto investors flee equity markets simultaneously. Mainstream financial firms adopting digital-asset products has further bound crypto to traditional markets.
BlackRock, managing $13.5 trillion in assets, serves as custodian for the world's largest bitcoin ETF. Interestingly, one-third of customers who bought into this fund as their first BlackRock product subsequently invested in the firm's more traditional ETFs. The European Systemic Risk Board, a financial watchdog, explicitly fears that failure of a large crypto-investment product could spill across conventional finance. "The overall volumes have now reached levels that make this scenario a genuine concern," the board wrote last month.
Stablecoins Create Additional Overlap Concerns
Stablecoins represent another significant source of market overlap. These crypto assets are designed to maintain stable value and facilitate payments. The outstanding market for stablecoins has grown almost 50% in the past year, exceeding $300 billion. In July, they gained regulatory certainty in America when the GENIUS Act specified assets their issuers could hold.
However, most stablecoins currently facilitate transactions within crypto rather than outside it. This means bear markets in riskier crypto assets can trigger outflows from stablecoins. Since these are mostly backed by American Treasury securities, a significant shock could potentially shake bond markets if issuers must fire-sell assets to return cash to investors.
Any stablecoin not fully backed by the safest assets might "de-peg" and enter a bank-run-like spiral, accelerating liquidations throughout the system.
Potential Catalysts for Recovery Appear Limited
Crypto may have exhausted most obvious catalysts for a proper rebound. Greater investment ease and more regulatory certainty have already materialized. Yet one piece of news could potentially help prices soar again. Enthusiasts received less than they hoped from the Strategic Bitcoin Reserve, established by Mr. Trump in March. It remains primarily a vehicle for bitcoin acquired through law-enforcement seizures.
Some legislators, including Republican Senator Cynthia Lummis, have supported purchasing more bitcoin on the open market. If prices continue falling, advocates might label it a buying opportunity. Crypto fans close to the administration—many currently nursing losses—would likely agree. The prospect of government intervention seems remote, but with both crypto and politics, surprises can never be completely ruled out.
