Author: Matt Hougan, Chief Investment Officer of Bitwise; Compiled by Jinse Finance
An in-depth analysis of the three core questions regarding the recent market correction.
$Bitcoin (BTC.CC)$ On February 6, the market plummeted by 14%, with a cumulative decline of 25% over the past week. This represents a 54% drop from the all-time high set four months ago. Other crypto assets experienced synchronized declines. Many investors have raised three major questions:
Why is the market falling?Will it continue to fall?
When will it bottom out? What factors can drive a recovery?
Below are the detailed answers.
1. Why is the market falling?
There is never a single reason for a decline in the cryptocurrency market; rather, it is the result of multiple factors working together. This pullback was primarily driven by six key factors:
Factor 1: Early realization of four-year cycle gains
This is the most fundamental and direct reason: long-term crypto investors sold early to lock in profits and avoid the four-year cycle pattern.
The cryptocurrency market has historically followed a four-year cycle, with a downturn often following three years of growth. Bear markets occurred in 2014, 2018, and 2022. Many long-term investors, concerned about the recurrence of this cycle, have chosen to cash out. It is estimated that the value of Bitcoin sold by such investors last year far exceeded USD 100 billion.
Factor 2: 'Attention Investors' Shift to AI and Precious Metals
In recent years, the cryptocurrency market has attracted substantial retail investment due to its high热度 and volatility. However, AI stocks and the recent surge in precious metals have captured market attention, causing these hotspot-driven 'attention investors' to temporarily withdraw from the crypto space.
Factor 3: The October 11 Leveraged Liquidation Event
On October 11, the cryptocurrency market experienced the largest leveraged liquidation in history. The trigger was President Trump's sudden announcement on Friday evening of imposing a 100% tariff on all Chinese goods. With most financial markets closed at the time, traders vented their emotions through the crypto market, triggering a chain reaction of liquidations.
Factor 4: Concerns Over Kevin Warsh's Nomination as Federal Reserve Chair
On January 30, Trump nominated Kevin Warsh as the next Federal Reserve Chair. Although I personally believe he is an excellent candidate, he is the most hawkish among the four candidates, and the market is concerned that his policies will tighten liquidity, negatively impacting risk assets.
Factor 5: Concerns About Quantum Computing Threats
In recent months, prominent figures in the crypto space, including Nic Carter and Willy Woo, have expressed ongoing concerns that the Bitcoin community remains inadequately prepared to address the risks posed by quantum computing.
Quantum computing represents a long-term but solvable risk for Bitcoin. However, until the development community presents concrete solutions, some early crypto investors remain cautious.
Factor 6: Rising risk aversion in the macro market
Bitcoin was weighed down by global market risk aversion. On the 6th, not only did Bitcoin plummet, but gold fell by 4%, silver plunged by 20%, and leading tech stocks such as Microsoft, Palantir, and Amazon also suffered significant declines.
Positive signals: Some bearish factors have shown signs of exhaustion. On-chain data indicates that long-term holders have stopped heavy selling and started to accumulate positions incrementally; open interest at Bitcoin derivatives exchanges has dropped to 2024 levels; CME futures data shows growing market expectations for rate cuts.
The current sentiment in the cryptocurrency market is near historical lows, comparable to levels seen during the bottoming out phases in 2018 and 2022, with most bearish factors likely already priced in by the market.
Section Two: Will it continue to decline?
It is possible, but the likelihood of another crash on the scale of 77% is low. Historically, the current 54% drop is not an extreme value:
In 2014, Bitcoin plummeted by 86%
In 2018, it crashed by 84%
In 2022, following the FTX collapse, it plunged by 77%
Historically, bear markets have lasted an average of 12-13 months, suggesting there may still be room for further correction. The 'market bottoming model' shows an increased probability of a bottom, though it is not guaranteed.
Overall, crypto assets have matured further, making the likelihood of a 77% level crash lower; however, there remains a possibility of further short-term downside.
Thirdly, when will the bottom be reached? What factors can drive a recovery?
This is the most crucial question.
Having gone through multiple bear markets, such as in 2018 (Bitcoin fell 84%) and 2022 (fell 77%), investors’ anxiety and concerns about the relentless declines are strikingly similar.
In hindsight, those moments presented excellent buying opportunities: those who bought at the bottom in 2018 have gained approximately 2000%, while those who entered in 2022 have achieved returns of about 300% over three years.
For long-term investors, the current situation also represents a similar opportunity. The positive fundamentals of the crypto space over the past year remain unchanged: accelerated digitalization, growing demand for non-fiat currencies, gradually clarified regulations, widespread adoption of stablecoins, the rise of asset tokenization, implementation of new applications like prediction markets and AI finance, and Wall Street’s investment in blockchain. Current prices have yet to reflect these advancements, but in the long term, fundamentals determine value.
Catalysts for Bottoming Out and Recovery
Bear markets typically end when market sentiment is exhausted, rather than being driven by positive catalysts. The following events may serve as reversal signals:
Passage of the Cryptocurrency Market Structure Act
Macromarkets returning to a risk-on environment
Progress has been made in addressing quantum computing risks.
Expectations for interest rate cuts are rising.
Breakthroughs have been achieved in the integration of encryption and AI.
If positive developments emerge, the market will rebound quickly; if not, it will gradually stabilize. At this stage, investors are advised to remain patient and focus on long-term goals.
Over the past decade, Bitcoin has experienced multiple bull and bear cycles along with significant volatility, enduring deep corrections and market panic on several occasions.
However, over an extended period, its long-term compounded returns have significantly outperformed mainstream traditional assets such as stocks and gold, continuously validating its value and resilience as a long-term allocation.
As shown in the figure below, investing $10,000 in BTC 10 years ago and holding until now would result in a market value far exceeding that of assets like gold, the S&P 500 Index, or U.S. Treasury bonds.
Fellow investors, did you choose to invest in BTC during this recent downturn?
Futubull’s Crypto page has officially launched! It supports configuration as a primary navigation button, offering comprehensive access to market data and information.
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Editor/Doris
