(Bloomberg) — Understanding the factors influencing Bitcoin’s price can be a complex task, as various conflicting catalysts are at play.
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This appears to be the current situation, as market analysts work to determine the reasons behind a decline that has seen the original cryptocurrency drop by as much as 28% from its all-time high of over $109,000 on January 20, coinciding with the inauguration of crypto advocate Donald Trump as President of the United States.
Here are the primary reasons cited for this downturn:
Macroeconomic Factors
Bitcoin is not the sole asset to experience declines in recent weeks. The US stock market has also faced a downturn, with the Nasdaq 100 Index falling roughly 7% since its peak on February 19. Bitcoin is typically regarded as a “high beta” asset, meaning it tends to move more dramatically in the same direction as stock fluctuations.
The recent stock market decline, along with a concurrent increase in US Treasury prices, is largely attributed to concerns over the potential economic impact of Trump’s plans to impose additional tariffs on trading partners.
“This decline can be interpreted as a reaction to macroeconomic anxieties regarding Trump’s tariffs and geopolitical instability,” stated Caroline Bowler, CEO of BTC Markets, in reference to the recent slump in crypto values.
The Largest Cyber Heist
The losses leading Bitcoin and the second-largest cryptocurrency, Ether, to hit multi-month lows occurred after the February 21 hack of the Bybit exchange. This breach, which many attribute to North Korea’s Lazarus Group, resulted in almost $1.5 billion being siphoned from the exchange.
Not only did this represent the largest theft in crypto history, it also rattled the market since it targeted a type of crypto custody known as a “cold wallet,” typically considered very secure due to its use of hardware not linked to the internet.
“Confidence was shaken after the $1.5 billion heist, which is a substantial amount,” remarked Zaheer Ebtikar, co-founder of crypto fund Split Capital. “There are certainly individuals who are thinking: ‘Maybe I’ll wait this out a bit longer.’”
ETF Outflows
It is important to note that there is some redundancy in linking the inflow and outflow of spot-Bitcoin exchange-traded funds to the cryptocurrency’s price, as both phenomena may arise from similar causes.
However, there is a feedback loop at play. As Bitcoin prices decline, investors generally withdraw funds from the ETFs associated with the asset. Subsequently, these outflows can signal to crypto traders to sell even more Bitcoin.
The drop in Bitcoin during February coincided with the most significant monthly net outflow from the group of spot-Bitcoin ETFs since their inception in January 2024, totaling approximately $3.3 billion, as per data compiled by Bloomberg.
“Speculative money that follows Bitcoin, or any speculative investment, exits as quickly as it entered when prices begin to decline,” explained Michael Rosen, chief investment officer at Angeles Investments.
‘Cash and Carry’ or Basis Trades
Ebtikar and others suggest that a reversal of what is known in the crypto world as the “cash and carry trade” has also contributed to the selloff. This strategy resembles what is referred to as the basis trade in traditional markets, where traders capitalize on pricing differences between spot and futures markets.
When futures market prices exceed spot prices, a trader can sell futures and purchase spot Bitcoin, profiting from the price disparity. However, futures traders on the CME and elsewhere remain cautious, with low premiums on Bitcoin futures. March annualized premiums have fallen to 5.7%, with next-month premiums hitting lows not seen since last July, according to a February 25 report by K33 Research.
The ETF outflows in the US were primarily influenced by arbitrage players like hedge funds engaging in basis trading via futures and/or options,” stated Mark Connors, founder and chief investment strategist at Risk Dimensions. “Naturally, there are also outright sellers. However, we observe that most outflows stem from profitable arbitrage opportunities that surged in this recent selloff.”
The Trump Trade Retreat
Assets that many believed would benefit from Trump’s return to the presidency have seen declines recently. Bitcoin, often viewed as the most prominent “Trump trade,” has faced its own challenges, especially considering Trump’s vocal support for the industry during his campaign. Although the Securities and Exchange Commission has lifted several lawsuits and investigations into crypto firms in the initial weeks of his presidency, advancements in further support have been slow, at least based on traders’ perspectives.
During his campaign, Trump pledged to establish what he called a strategic national stockpile of Bitcoin, beginning with tokens already held by the US government after asset seizures. His Republican ally, Senator Cynthia Lummis from Wyoming, subsequently introduced a bill proposing the government accumulate up to a million Bitcoin over five years. However, there has been little discussion surrounding this plan since its introduction, and Lummis’s bill has not gained significant traction in Congress. While Trump’s executive order aimed at the industry called for the establishment of a digital asset stockpile, it fell short of a commitment to create a Bitcoin reserve.
“A significant factor in this decline is the absence of the positive executive order news that some analysts had anticipated, coupled with US inflation metrics,” noted Paul Howard, senior director at market maker Wincent.
On Friday, Lummis indicated that progress on the Bitcoin stockpile initiative might take longer than many advocates would prefer, asserting, “My hunch is that states will establish their own Bitcoin strategic reserves before the federal government does.”
The outlook for this initiative is not overly promising either; lawmakers in Montana, North Dakota, South Dakota, and Wyoming have recently voted against the establishment of state-level crypto reserves, citing worries about the risks and volatility associated with digital currencies.
–Contributions from Sidhartha Shukla and David Pan.
