The once-vibrant crypto market has taken on a decidedly somber tone in recent days, as major cryptocurrencies like bitcoin (BTC), ether (ETH), solana (SOL), Binance coin (BNB) and chainlink (LINK) trade as much as 3% lower. The downturn comes amid growing frustration over the slow pace of progress on establishing a U.S. strategic bitcoin reserve, as well as ominous signs of tightening dollar liquidity that threaten to sap risk appetite from the market.
Hopes for a Bitcoin Bailout Fade
According to Geo Chen, a macro trader and author of the popular Substack newsletter Fidenza Macro, the crypto market has been largely propped up in recent months by hopes that the Trump administration would intervene to “buy everybody’s bags.” However, the likelihood of such a bitcoin bailout materializing anytime soon appears to be fading fast, leaving the market vulnerable to risk-off moves driven by ongoing trade tensions.
Crypto will not be spared in the ensuing risk-off volatility, and I expect many coins to draw down 50% or more from their January highs.
– Geo Chen, Fidenza Macro
Derivatives Hint at Darkening Outlook
The gloomy sentiment is evident in the derivatives market as well. Amberdata’s options block flow tracker revealed a sizable bear put spread on SOL, involving a long position in the $200 put and a short position in the $120 put, both expiring on Feb 28. This strategy is a clear bet on a steep decline to at least $120 by month-end, underscoring the increasingly pessimistic outlook.
It’s a similar story for ether. ETH has already fallen 15% this month and reached its lowest level in four years against bitcoin. Joe McCann, founder and CEO of crypto asset management firm Asymmetric, pointed to weakening fundamentals as a key driver of ether’s underperformance relative to bitcoin.
Ethereum’s fundamental positioning has weakened. Solana’s ecosystem is expanding rapidly, offering higher throughput and stronger performance, making Ethereum’s historical valuation premium harder to justify.
– Joe McCann, Asymmetric
Dollar Liquidity Fears Compound Crypto Woes
Adding to the market’s woes are growing concerns about tightening dollar liquidity conditions. Investors are pivoting toward safe havens like gold and U.S. Treasuries amid heightened trade war fears, pushing gold prices to a new record high of $2,877 per ounce, a gain of 10% for the year. Historically, periods of strong safe-haven demand have not been favorable for risk assets like bitcoin.
The specter of dollar liquidity stress is also evident in the rising yields on 10-year Japanese government bonds, which have hit their highest levels since 2011. With the crypto market still heavily dependent on ample dollar liquidity to fuel risk-taking, any signs of tightening financial conditions are likely to weigh on sentiment.
All Eyes on Economic Data and Regulation
Looking ahead, crypto market participants will be keeping a close eye on key economic data releases and regulatory developments for clues on the future direction of the market. Today’s U.S. ADP employment report, in particular, has the potential to inject volatility, especially if it comes in stronger than expected and fuels concerns about tighter monetary policy.
At the same time, ongoing regulatory scrutiny of the crypto industry remains a key source of uncertainty. Today’s hearings on Capitol Hill regarding debanking of crypto companies and the “Operation Chokepoint 2.0” controversy could provide fresh fodder for market moves, depending on the tone of the discussions.
Clearly, the crypto market finds itself at a delicate juncture, buffeted by a perfect storm of slowing U.S. bitcoin reserve progress, rising dollar liquidity fears, and persistent regulatory headwinds. While the long-term outlook for the industry remains bright, the near-term picture has darkened considerably, setting the stage for what could be a turbulent few weeks ahead. As always, crypto traders and investors will need to stay nimble and attentive to navigate the rapidly shifting landscape.
