Why Crypto Is Down and When It Might Bottom

Addressing three big questions on the recent market pullback.

Bitcoin fell 14% yesterday and 25% in the past week. Other crypto assets have followed. And although bitcoin is up sharply this morning, it still sits almost 50% below its all-time high, set just four months ago. Many of you have written with three big questions:

1. Why is the market down?

2. Could it fall further?

3. When will it bottom, and what could help it recover?

I will do my best to answer them here.

1. Why Is the Market Down?

There is never a single reason why the crypto market falls. Markets are complex, and there are always multiple factors at work. In past bear markets, I’ve found that listing all the contributing factors in black and white has helped me understand what was really happening.

In this case, I think there are six big ones:

Factor 1: Front-Running the Four-Year Cycle

The biggest reason is also the simplest: Long-term crypto investors have been selling to front-run the four-year cycle.

As readers of this memo know, crypto has historically moved in four-year cycles, with three big up years followed by a pullback. We had these down years in 2014, 2018, 2022, and … well … you can do the math.

It sounds too simple, and it is a self-fulfilling prophecy, but one of the major reasons for the current pullback is that long-term crypto investors have been worried the cycle would repeat. Rather than stand firm, many of these investors decided to take gains. While measurements are imperfect, I estimate these investors sold well north of $100 billion of bitcoin last year.

Factor 2: The Loss of the “Attention Investor” to AI and Metals

Crypto has benefited in recent years from being the most exciting, dynamic, and volatile segment of the market. This has attracted significant retail participation. But today, crypto is not the only hot thing. AI stocks—and, more recently, precious metals—have stolen some of the spotlight. “Attention investors” can be fickle, and may yet turn their attention back to crypto—but for now, they are a source of capital that has partially withdrawn from the crypto ecosystem.

Factor 3: The October 10 Leverage Liquidation Event

Crypto experienced the largest leveraged blowout in its history on October 10. It happened after President Trump announced a surprise 100% tariff on all Chinese goods at 5:30 p.m. ET on a Friday. With most financial markets closed, traders reached for crypto to express their displeasure.

Factor 4: Concerns About Kevin Warsh as Fed Chair

On January 30, President Trump nominated Kevin Warsh to be the next chairman of the Federal Reserve. While I personally believe Warsh will prove an excellent choice, he was seen as the most hawkish of the four candidates.

Factor 5: Quantum Fears

Over the past few months, there has been rising concern among bitcoin advocates—including high-profile thought leaders like Nic Carter and Willy Woo—that the community is not doing enough to address the future risk of quantum computing.

I believe that quantum is both a long-term risk and a solvable problem for bitcoin. But it doesn’t matter what I believe. Until we see concrete steps on quantum from the bitcoin development community, a portion of the OG crypto investment community is going to remain stuck on the sidelines.

Factor 6: Macro Risk-Off Sentiment

Bitcoin has suffered from the broader market’s risk-off shift. Yesterday, bitcoin wasn’t the only thing that was down: Gold fell 4%, silver tumbled 20%, and tech blue-chips like Microsoft, Palantir, and Amazon were down significantly as well.

The good news: Some of these factors show signs of exhausting themselves. According to onchain data, long-term holders have stopped selling aggressively, and some are beginning to nibble around the edges. Open interest on bitcoin derivatives exchanges has fallen to levels last seen in 2024. And rate cut expectations are now increasing, according to CME futures traders.

With crypto market sentiment near historic lows—and around the levels where crypto bottomed in 2018 and 2022—it feels like much of the bad news is already priced in.

2. Could It Fall Further?

Yes, it’s possible, if history is any guide.

Previous drawdowns have been significantly larger than the current 54% fall from the peak. Bitcoin fell 86% in the 2014 drawdown, 84% in 2018, and 77% in the 2022 post-FTX collapse. And prior crypto downturns have tended to last 12-13 months, meaning this one could have a ways to go. Our internal “market bottom” models suggest the probability of a bottom is increasing, but it’s not a surety.

Big picture: My view is that crypto is a more mature asset class than it was in the past, and we are unlikely to see a 77% drawdown again. But it could go lower from here.

3. When Will It Bottom, and What Could Help It Recover?

This is the most important question.

Bitwise has been around for eight years, and we have lived through multiple bear markets. We were here in 2018, when bitcoin fell 84%, and in 2022, when it tumbled 77%. And today feels a lot like those moments.

That anxious feeling in your stomach? It was there in 2018. The worry that the pullback wouldn’t stop? We had that in 2022.

In hindsight, those were incredible buying opportunities. An investor who “bought the dip” in 2018 is up ~2,000% since. The 2022 investor is up ~300% in a little over three years.

For those with a long-term horizon, the current moment is a similar opportunity. All of the good news we’ve highlighted about crypto in the past year is still true. The world is increasingly digital. It increasingly demands non-fiat currencies. We’re seeing regulatory progress. Stablecoins are ascendant. Tokenization is taking off. New use cases, like prediction markets and so-called “AiFi,” are emerging. Wall Street is building on blockchains. Right now, the prices don’t reflect that progress. But fundamentals are what drive things over the long term.

What could be the catalyst that turns things around? More often than not, it’s simply time. Crypto bear markets tend to end in exhaustion, not excitement. 

But there are a few specific events to look forward to, like the potential passage of the Clarity Act, a shift back to risk-on markets, progress on quantum, rising rate-cut expectations, AI-linked crypto breakthroughs, and more.

If we get a positive shock, great. If not, we’ll grind out a bottom. In the meantime, I’d prescribe two things: patience and an eye on the destination.

Risks and Important Information

No Advice on Investment; Risk of Loss: Prior to making any investment decision, each investor must undertake its own independent examination and investigation, including the merits and risks involved in an investment, and must base its investment decision—including a determination whether the investment would be a suitable investment for the investor—on such examination and investigation.

Crypto assets are digital representations of value that function as a medium of exchange, a unit of account, or a store of value, but they do not have legal tender status. Crypto assets are sometimes exchanged for U.S. dollars or other currencies around the world, but they are not currently backed nor supported by any government or central bank. Their value is completely derived by market forces of supply and demand, and they are more volatile than traditional currencies, stocks, or bonds.

Trading in crypto assets comes with significant risks, including volatile market price swings or flash crashes, market manipulation, and cybersecurity risks and risk of losing principal or all of your investment. In addition, crypto asset markets and exchanges are not regulated with the same controls or customer protections available in equity, option, futures, or foreign exchange investing.

Crypto asset trading requires knowledge of crypto asset markets. In attempting to profit through crypto asset trading, you must compete with traders worldwide. You should have appropriate knowledge and experience before engaging in substantial crypto asset trading. Crypto asset trading can lead to large and immediate financial losses. Under certain market conditions, you may find it difficult or impossible to liquidate a position quickly at a reasonable price.

The opinions expressed represent an assessment of the market environment at a specific time and are not intended to be a forecast of future events, or a guarantee of future results, and are subject to further discussion, completion and amendment. The information herein is not intended to provide, and should not be relied upon for, accounting, legal or tax advice, or investment recommendations. You should consult your accounting, legal, tax or other advisors about the matters discussed herein.