Huge price declines aren’t anything new for bitcoin investors. The highly volatile digital asset tends to serve as a proxy for risk appetite and liquidity, plunging when investors become cautious over macroeconomic or market risks.
But bitcoin’s current pullback, which now amounts to more than 30% from its recent all-time high, is different than prior declines, and could be more difficult to recover from, Deutsche Bank analysts wrote on Monday.
Deutsche Bank cited a couple of factors that distinguish the current bear market.
“Unlike prior crashes, driven primarily by retail speculation, this year’s downturn has occurred amid substantial institutional participation, policy developments, and global macro trends.”
The first big thing the bank flags is that adoption is stalling. According to the bank, crypto usage is down to 15% of retail traders from 17% this summer.
This is important because steadily widening adoption and use of bitcoin is one of the fundamental drivers behind its bull case.
“The crypto’s underperformance also resurfaces our ‘Tinkerbell effect’ theory that Bitcoin’s valuations depend partly on belief-driven adoption,” analyst Marion Laboure wrote on Monday. “During this correction, the ‘Tinkerbell effect’ is prevalent as sentiment-driven selling has reinforced the price decline.”
The second reason the latest plunge could be different is that institutional investors are now exposed to bitcoin through ETFs. The first bitcoin ETFs were approved in January 2024, which kicked off a 600% rally in the asset. This is the first decline of at least 30% in bitcoin’s price since the funds began trading.
While institutional participation has boosted gains over the last couple of years, it’s that very same exposure to bitcoin that has also now contributed to a feedback loop of falling liquidity and heightened selling, DB said.
All of this means it could be tougher for the apex cryptocurrency to pull itself out of its latest slump.
“Thinning liquidity across Bitcoin order books has limited the crypto’s ability to significantly recover from macro headwinds,” Deutsche Bank wrote. “Whether Bitcoin stabilizes after this correction remains uncertain,” Laboure added.
She continued: “Looking ahead, Bitcoin’s maturation will likely continue in phases. Greater regulatory clarity — especially from recent crypto market structure reforms — could support institutional confidence, while the adoption of stablecoins by major institutions may bolster market liquidity.”