Blood on the Streets

Blood on the Streets

Bitcoin endured a brutal and disorderly week, breaking decisively below the 70,000 level and briefly trading down to the low 60,000s. In nominal terms, the daily drawdown was larger than anything seen during the FTX collapse in 2022. The speed of the move, more than the absolute price level, was what unsettled markets.

The sell-off unfolded in classic sell-first, ask-questions-later fashion. Liquidity thinned rapidly, stops were triggered across venues, and momentum flipped sharply negative. What initially looked mechanical quickly became reflexive, eroding confidence after weeks of relative calm. That said, heading into the weekend, early signs of stabilisation began to emerge.

Crypto-linked equities such as Strategy, BitMine, and Coinbase showed tentative signs of bottoming before spot markets did. Equity investors appeared quicker to price in relief, suggesting that the worst of the forced selling may have passed. Once again, sentiment seemed to surface first in public markets, underlining the increasingly tight feedback loop between crypto equities and the underlying assets.

What Changed

Until recently, our base case was consolidation. Bitcoin had been digesting persistent structural supply from whales and long-term holders against a backdrop of improving US liquidity and broadly supportive macro conditions. While we had flagged elevated geopolitical risk and funding uncertainty, the speed and magnitude of this move exceeded expectations.

To understand the shift, it helps to revisit the liquidity regime that powered risk assets higher over the past two years. From late 2022 through most of 2025, abundant global liquidity driven by rate cuts, Chinese stimulus, and the drawdown of more than two trillion dollars from the Fed's Reverse Repo Facility offset the effects of quantitative tightening. As the highest beta liquidity asset, Bitcoin benefited disproportionately.

That regime broke in the fourth quarter of 2025. The Reverse Repo Facility was fully drained, removing a key liquidity buffer. At the same time, quantitative tightening continued and a prolonged government shutdown forced the Treasury General Account to rebuild above one trillion dollars. Treasury issuance absorbed liquidity that could not be recycled via government spending, leading to funding market stress and pressure on liquidity-sensitive assets, with Bitcoin first in line.

We expected excess bank reserves to cushion this transition for longer. That assumption proved optimistic. The Federal Reserve ultimately ended quantitative tightening and announced Reserve Management Purchases of short-dated Treasury bills, restarting balance sheet expansion at roughly forty billion dollars per month. With the US liquidity pulse now turning higher, we continue to expect Bitcoin to recover over the coming months.

Equities and gold proved more resilient during the drawdown, largely due to positioning and flows. Equity investors were underexposed after the April pullback and were forced to chase performance into year-end. Gold continues to benefit from sustained central bank demand as part of a broader de-dollarisation trend amid rising geopolitical fragmentation. Bitcoin, by contrast, faced persistent supply from long-term holders above the 100,000 level, with insufficient marginal demand to absorb it.

Additional headwinds also played a role. Capital destruction following the October liquidation event reduced risk appetite, while competition from AI related investments diverted incremental capital. Still, liquidity remained the core driver. When liquidity tightens, Bitcoin is almost always the first asset to feel it.

Warsh and the Balance Sheet Debate

Pressure briefly intensified following the nomination of Kevin Warsh as Federal Reserve Chair. Warsh is widely viewed as a balance-sheet hawk, favouring a smaller Fed balance sheet and greater reliance on private credit creation. The announcement coincided with a sharp flush in gold and silver, adding to broader risk aversion.

We view these concerns as overstated. In practice, balance sheet expansion tends to be a necessity rather than a policy preference when funding markets come under strain, as evidenced by the recent resumption of Treasury bill purchases. Any push toward a smaller public balance sheet is likely to be offset by regulatory changes such as supplementary leverage ratio relief, shifting liquidity provision toward private balance sheets rather than draining it from the system.

Against this backdrop, we remain constructive on both equities and crypto over the coming months, supported by robust US growth, renewed disinflationary pressures, and an improving liquidity impulse.

What Drove the Capitulation

One plausible explanation for last week's extreme volatility is forced deleveraging by a multi-asset fund in Asia. Evidence suggests stress was concentrated in IBIT ETF liquidations rather than crypto-native venues, implying this was not driven by a crypto-specific blow-up. Thursday saw record volumes in both IBIT and its options, while the tight correlation between Bitcoin and the sell-off in software stocks points to an unwind of a highly correlated multi-asset trade.

As positions were liquidated, dealers were left significantly short gamma and were forced to sell IBIT to remain delta neutral, amplifying the downside. For the purposes of this newsletter, the key takeaway is that the move appears to have been driven by forced deleveraging in traditional finance rather than any fundamental deterioration in Bitcoin itself.

The open question is whether additional casualties remain or whether last week marked the final capitulation. Caution remains warranted in the near term, but for those once again writing Bitcoin's obituary on what has historically been a common cyclical drawdown, we see little reason to revise our long-term conviction.

When there is blood on the streets, history suggests patience is often rewarded.

Bitcoin Mining Difficulty Drops 11%

Bitcoin mining difficulty fell by 11.16 percent on Saturday to 125.86 trillion, marking the largest single negative adjustment since China's mining ban in July 2021 and one of the largest drops on record. The adjustment followed a roughly 20 percent decline in network hashrate over the past month, with average block times drifting well above the protocol target prior to the retarget. (CoinDesk)

Tether Q4 Report: 534 Million Users

Tether released its fourth quarter market report, showing continued growth despite October's market turbulence. Stablecoin market capitalisation reached a new high of 187.3 billion dollars, up 12.4 billion during the quarter. The network added an estimated 35.2 million new users, bringing the global total to over 534 million. Tether's reserves grew to 192.9 billion dollars, including substantial holdings of US Treasuries, Bitcoin, and gold. (Reuters)

Ethereum Foundation Security Dashboard

The Ethereum Foundation announced the launch of a Trillion Dollar Security Dashboard, offering a structured overview of Ethereum's security posture across user experience, smart contracts, infrastructure, consensus, monitoring, and governance. (Decrypt)

Strategy Reports 713,502 BTC Holdings

Strategy reported fourth quarter and full year results, disclosing Bitcoin holdings of 713,502 BTC acquired at an average cost of 76,052 dollars per coin. The company raised 25.3 billion dollars during 2025 and established a sizeable cash reserve, though it recorded significant unrealised losses under fair value accounting during the quarter. (CNBC)

CME Group Explores Own Coin and 24/7 Crypto Trading

CME Group revealed it is actively exploring the launch of its own coin and the transition of all crypto products to round-the-clock trading. The exchange is also advancing a tokenised cash initiative in partnership with Google, aimed at enabling secure wholesale payments and asset tokenisation. The comments underscore growing institutional momentum toward on-chain financial infrastructure. (CoinDesk)