Author: The Economist

Translated by: Shenchao TechFlow

Shenchao Guide: Although the price of Bitcoin is still above $70,000, the crypto market is experiencing an unprecedented "lonely winter." This article delves into how this round of decline differs from previous ones: the chain reaction of leveraged liquidations, the once-promising ETFs now becoming the agents of sell-offs, and most importantly—the loss of "vibe."

As cryptocurrencies have shifted from a counter-mainstream cool culture to being embraced by the elite yet not truly accepted by the mainstream financial system as "mediocre assets," their premiums are quickly evaporating.

The author warns that if that unique enthusiasm cannot be regained, this cold winter may turn out to be exceptionally long.

The full text is as follows:

Cold winds have swept the U.S. East Coast for several weeks, with temperatures in some areas dropping to the lowest in decades. But compared to the "deep freeze" into which investors have pushed crypto assets, this is trivial. The price of Bitcoin has fallen from $124,000 in early October to around $70,000 now, and the total market value of all cryptocurrencies has shrunk by more than $2 trillion. Although such assets have previously suffered severe blows, the current sense of frustration among their supporters seems stronger than ever.

In some ways, the extent of their suffering is inexplicable. A 45% drop in Bitcoin's price is by no means the worst in history: from its peak at the end of 2021, its price once plummeted by 77%. At that time, it took the crypto industry about three years to restore its market value to its peak. Yet the current bear market has just lasted four months.

But look at the performance of other asset classes. In 2022, crypto investors could still find solace, as everyone was losing money. That year, the Nasdaq 100 index, dominated by tech stocks, fell more than a third from its peak to its trough. Now, that index is less than 4% away from the historic high it reached just weeks ago (although some software companies have underperformed). The sadness among crypto fans stems from their sense of isolation.

The forces driving such a volatile and speculative market always carry a sense of mystery. However, it is evident that leverage and liquidations are playing a significant role. As of the end of September, just before the crash began, the monitored crypto asset lending scale was about $74 billion—more than doubling in the past 12 months, surpassing levels at the end of 2021.

Subsequently, starting from October 10, due to massive losses, leveraged positions valued at around $19 billion were rapidly liquidated. After that, a series of smaller positions were closed out. Concerns about Strategy Inc (a company that buys Bitcoin through borrowing and issuing stock) have intensified. Its share price has fallen nearly 70% since July.

The variety of crypto products may have exacerbated this decline. The arrival of crypto exchange-traded funds (ETFs) in 2024 was intended to support prices by expanding the potential buyer pool. This did work for a time. The iShares Bitcoin Trust ETF (IBIT) became the fastest-growing ETF in history, with assets nearing $100 billion by October. However, now, the ETFs are dragging down prices. In the past 80 trading days, IBIT has seen $3.5 billion in outflows—marking its first sustained sell-off. Most of the funds invested in this ETF are currently suffering losses.

The last factor suppressing cryptocurrencies is the hardest to quantify: the "vibe" is off. For a speculative asset class without fundamental value or profit potential, the intangible "aura" is everything. And the excitement that once surrounded digital assets seems to have faded away.

Part of the reason is that they have lost their rebellious character. If the U.S. President and his family are deeply involved in an asset class, how much "counterculture" can it still possess? Charles Hoskinson, co-founder of the blockchain platform Ethereum, articulated this well last month: "We have basically all become part of the system. You know what happens when you become part of the system? It makes it no longer cool."

For some companies, the newly acquired "stuffy" reputation of cryptocurrencies has its benefits. Institutional involvement has helped stablecoin issuers, thereby simplifying digital payments. However, assets like Bitcoin, while losing their "cool" appeal, have gained little in return; they appear to be part of the "system," yet have not been truly adopted by it. Professional, conservative investors continue to avoid cryptocurrencies. A September survey by Bank of America showed that the vast majority of fund managers have no allocation to cryptocurrencies at all. Digital assets account for only 0.4% of the total value of respondents' portfolios.

Meanwhile, central banks around the world are buying gold to protect themselves from inflation, geopolitical threats, and the risks of sanctions. Those digital assets that once promised to serve as "fiat currency" alternatives are now sidelined. The Czech central bank became the first to publicly announce the purchase of cryptocurrencies last year, acquiring $1 million worth of experimental (and negligible) Bitcoin. It has not announced any further purchase plans yet.

Digital assets have proven to be far more resilient than many financial columnists (who have always been eager to write their obituaries) ever doubted. Despite enduring bear market after bear market, they always withstand the prophecies of complete collapse. But there are ample reasons to indicate that this crypto winter feels exceptionally bitter. Unless the vibe improves, do not expect any warming.