Why is Bitcoin crashing?

Anatomy of a leveraged deleveraging spiral

Everyone’s looking for the one thing that broke Bitcoin.

The smoking gun. The single catalyst. The moment it all went wrong.

Wrong question.

What we’re watching isn’t a cause-and-effect story. It’s a system collapse. Multiple failures happening simultaneously, each one amplifying the others until the whole structure comes apart. And the speed? That tells you how fragile the whole thing was to begin with.

Let me walk you through what I think what is happening.

Bitcoin ran from $40k to $126k in under a year. Not unusual in crypto terms, but the narrative behind it was specific: the Fed is going to cut rates, institutions are piling in through ETFs, and we’ve got a one-way ticket to price discovery. Clean story. Everyone bought it. Literally.

Futures markets ballooned to $94 billion in open interest. If you don’t trade derivatives, that number probably means nothing to you. Let me put it differently: some exchanges were offering leverage at 1,000-to-1 ratios. Put down a grand, control a million dollars of Bitcoin. This is the kind of setup that works beautifully until it doesn’t, and then it works catastrophically in reverse.

The Federal Reserve torched the whole narrative in a matter of weeks. Went from “we’re cutting rates soon” to “actually, we’re keeping them high” faster than you can say pivot. Market odds on December rate cuts collapsed from 90% to 40%. Real yields on short-term Treasuries? Still above 5%.

Think about what that means. You can park money in government bonds and earn 5% annually with zero risk. Or you can hold Bitcoin, which pays you nothing and moves 10% in a day. When you frame it like that, the question isn’t “why is Bitcoin falling?” It’s “why would anyone hold Bitcoin at these prices in this macro environment?”

The answer is: they won’t.

And here’s where it really gets interesting. Those ETFs everyone was celebrating last year? The ones that finally brought “real money” and “institutional credibility” to crypto? They created institutional-scale exit liquidity that never existed before. In 2017, if you wanted out of Bitcoin, you dealt with exchanges that might freeze withdrawals, banking systems that hated you, and settlement times measured in days. Friction everywhere.

Now? Fund managers click sell. Done. $1.1 billion flowed out in days. These aren’t retail investors panic-selling their life savings. These are professionals with mandates, risk limits, and quarterly reviews. When the thesis breaks, they don’t stick around to see if it fixes itself.

At the same time, long-term holders started distributing. 815,000 Bitcoin changed hands in 30 days. These are the people who bought between $40k and $80k and are sitting on triple-digit percentage gains. They’re not selling because they lost faith. They’re selling because they have profits and they see chop ahead. Why ride a 30% drawdown when you can step aside, keep your gains, and buy back in cheaper?

This is how smart money operates. Preservation first. Opportunity second.

Then the leverage started unwinding. Bitcoin broke $100k and every automated stop-loss in the derivatives complex triggered at once. Over $20 billion in positions got liquidated in recent weeks. Single sessions wiping out $3 billion.

Here’s how liquidations work if you’ve never traded on margin: you borrow money to amplify your bet. At 1,000x leverage, a 0.1% move against you destroys your entire position. The exchange doesn’t ask nicely. They sell your Bitcoin immediately to recover their loan. That selling pushes price lower. Which triggers more liquidations. Which pushes price lower. Which triggers more liquidations.

You see where this goes.

It’s a feedback loop. A cascade. The more it falls, the more it has to fall to clear out the next layer of leverage. Open interest dropped from $94 billion to $68 billion. That’s $26 billion of borrowed money that evaporated. And if you think it’s all clear now... probably not.

Because the simple truth is: there are no natural buyers at these levels.

Institutions are de-risking their portfolios. Long-term holders are waiting for cheaper entry points. Retail got scared watching billions disappear in hours. New buyers? They’re on the sidelines until the volatility settles and the leverage finishes flushing out.

So the market has to find the floor the hard way. It has to fall far enough that three things happen: all the excess leverage gets cleared, long-term holders stop selling and start accumulating again, and price reaches a level where actual value buyers think the risk-reward makes sense.

We’re not there yet.

You keep seeing headlines about Bitcoin losing $600 billion in market cap. Let me explain why that number is mostly fiction. When Bitcoin went from $40k to $126k, its market cap increased by roughly $1.7 trillion. But nobody deposited $1.7 trillion. The price went up and the math multiplied that price by 21 million coins. That’s how market cap works. It’s not actual money in the system. It’s a calculation.

On the way down, it works in reverse. Those gains evaporate because they were built on expectations that didn’t materialize. The Fed didn’t cut rates. Real yields stayed high. The dollar stayed strong. Every piece of the bullish macro thesis fell apart.

This is what happens with assets that have no cash flows. Stocks pay dividends. Bonds pay coupons. Those payments anchor the valuation to something real. Bitcoin doesn’t pay you anything. Its price is pure narrative plus supply and demand. When the narrative breaks and the demand is all leveraged speculators who need to exit... well, you’re watching what happens.

Is this surprising? Not if you understand the mechanics. This is standard deleveraging behavior in an asset with extreme leverage ratios, no fundamental anchor, a macro thesis that collapsed, and brand-new institutional infrastructure that works both ways.

A 25% correction after a 215% rally with $94 billion in leveraged bets? That’s not a black swan. That’s what normal looks like when you build that much fragility into a system.

The violence tells you about the leverage, not the asset.

Bitcoin itself hasn’t changed. The blockchain still works. The supply is still capped. The technology is identical to what it was at $126k. What changed is the environment around it and the amount of borrowed money betting on a future that didn’t arrive.

So when people ask “why is Bitcoin crashing?” they’re asking the wrong question. The mechanics are obvious. The Fed reversed course. Institutions exited. Long-term holders took profits. Leverage cascaded. Buyers disappeared.

The real question is: where does it stop?

What price brings back the buyers? Where do long-term holders start accumulating instead of distributing? At what level does the risk-reward look attractive enough for capital to flow back in?

The market’s figuring that out right now. Price discovery happening in real-time as each layer of leverage gets peeled away.

Until then, you’re just watching the deleveraging play out. And if you’re waiting for a single explanation, a clean narrative, one reason that ties it all together...

You’re going to keep waiting.

Because that’s not how systems fail.