Bitcoin’s $1trn identity crisis hits from every direction

It wouldn’t have seemed possible a year ago. But Bitcoin has gotten caught in one of its deepest struggles yet, with no obvious way out.

The world’s largest cryptocurrency has plunged more than 40% from its peak, and the usual playbook isn’t working — dip buyers have vanished, and the forces that would normally fuel a rebound are now working against it. Gold is winning the macro-hedge argument. Stablecoins are winning payments. Prediction markets are winning speculation.

The strange part: none of this is happening because the system failed Bitcoin. Washington has never been more accommodating. Institutional adoption has never been deeper. Wall Street has never been more bought in. Bitcoin got everything it wanted — and it wasn’t enough.

That means the defining struggle of this crypto era isn’t about price. It’s about purpose. And this selloff is forcing a question Bitcoin hasn’t needed to answer when prices were rising: if it isn’t the best hedge, the best payment rail or the best speculation — what, exactly, is it for?

“The central story of Bitcoin was ‘number go up’ and we don’t have that anymore,” said Owen Lamont, portfolio manager at Acadian Asset Management. “We have number go down. That is not a good story.”

The narrative problem

Unlike stocks or commodities, Bitcoin lacks fundamentals. Its value rests almost entirely on belief — on the strength of narratives that persuade new buyers to join.

Those stories are faltering. Retail traders who bought into the Trump-fueled rally are now deeply underwater.

“New speculative venues such as prediction markets — and commodities exchanges! — are siphoning away attention from crypto markets,” said Noelle Acheson, author of Crypto is Macro Now newsletter. “Now that BTC is a ‘macro asset,’ it has to compete with so many other alternatives, most of which are easier to understand and easier to explain to trustees, clients, your board, etc.”

The defections

A clear signal came in November. Jack Dorsey — long one of Bitcoin’s most vocal corporate evangelists — announced his Cash App would begin supporting stablecoins. For years, Dorsey treated Bitcoin maximalism as doctrine. His pivot was a signal: the payments race had moved on.

In Washington, stablecoins have become the center of gravity. The bipartisan Genius Act passed easily. Regulators are openly encouraging dollar-backed token infrastructure. Even within crypto, Bitcoin is no longer the sole focus. Tokenization, blockchain-powered derivatives and cross-border stablecoin payments are emerging as credible use cases — none of which require Bitcoin to function.

“If anything, stablecoin activity could be correlated with activity on Ethereum or on other chains. And stablecoins are for payments,” said Carlos Domingo, co-founder and CEO of Securitize, a tokenization platform. “I don’t think anybody today sees Bitcoin as a payment mechanism.”

The financialisation trap

Ironically, Bitcoin’s unraveling began during its own rise. The 2025 bull run triggered a rush of institutional infrastructure that was meant to cement its legitimacy. Instead, it stripped the asset of its mystique.

Once a cipher for libertarian escape, Bitcoin now resembles every other Wall Street instrument: a ticker in a drop-down menu, bundled with zero-day options and volatility products. What once required a rabbit hole now takes a brokerage login.

Bitcoin’s defenders still point to its engineered scarcity — the 21 million cap, halving cycles, hard-coded deflation. But in markets, the scarcity that matters isn’t just of supply — it’s of attention. And the supply of things competing for that attention is now effectively infinite.

Altcoins. Altcoin derivatives. Tokenized stocks. Structured leveraged products. Scarcity may be coded, but abundance is manufactured. And even the code itself is facing scrutiny — the rise of quantum computing has begun to fuel fears that Bitcoin’s cryptographic foundations, long assumed to be unbreakable, may not be permanent. It’s a distant threat, but in a narrative-driven asset, the mere possibility is corrosive.

The hedge that wasn’t

Even after years of “digital gold” hype, Bitcoin has failed its most important macro test. Despite geopolitical jitters and enduring dollar weakness, gold and silver have staged volatile rallies this year, while crypto has only gone down. Flows confirm the divergence. US-listed gold and gold-themed ETFs pulled in more than $16 billion in the past three months, while spot Bitcoin ETFs saw roughly $3.3 billion in outflows, according to data compiled by Bloomberg. Bitcoin’s market cap has shrunk by over $1 trillion.

“People are realizing that Bitcoin is what it’s always been — which is simply a speculative asset,” said Tom Essaye, president and founder of Sevens Report and a former Merrill Lynch trader. “Bitcoin is not replacing gold, it’s not digital gold, it doesn’t do the same thing, it doesn’t give people the same utility that gold does. It’s not an inflation hedge — there are other better hedges, frankly, where you don’t have to worry about the volatility. And it’s not a chaos hedge either.”

The treasury unwind

The digital-asset treasury model was supposed to be Bitcoin’s corporate identity. Companies like Strategy Inc. amassed Bitcoin during the bull run and issued shares against it, creating a self-reinforcing loop that conjured billions in market cap and gave institutional investors a way to express conviction without touching the asset directly. For a time, it worked.

Now the loop has reversed — and with it, the credibility of the model. The largest DATs have plunged over the past year — some far more than Bitcoin itself. Many now trade below the value of their holdings.

The speculation it lost

Bitcoin’s hold on speculative culture is slipping, too.

Prediction platforms like Polymarket and Kalshi — with binary outcomes, fast resolution and real-world stakes — are now playgrounds for the same dopamine-chasing traders who once rode meme coins.

This isn’t fringe: Polymarket’s weekly notional volume has surged over the past year. Even Coinbase Global Inc. has added prediction contracts. The dopamine didn’t disappear. It just moved.

“The prediction markets are becoming the next craze for the same DIY investors who enjoy the speculative nature of crypto,” said Roxanna Islam, head of sector and industry research at ETF shop TMX VettaFi. “That could mean less overall interest in crypto,” she said, though she added that “it could also mean a shift to more long-term, serious investors.”

The hidden wiring

Then there’s the growing mismatch between how Bitcoin is accessed, and how it trades. Spot ETFs have made it effortless to buy. But Bitcoin’s price is still influenced by offshore derivatives markets, where traders routinely run 100-to-1 leverage. These venues operate on automated liquidation engines: when positions breach margin thresholds, they are force-closed and sold into the order book instantaneously, triggering cascading liquidations that can crash the spot price in minutes.

That machinery was fully exposed in the October crash. Billions in leveraged positions were unwound in a flash. By the time most ETF holders checked their portfolios, the damage was done.

The bull case

None of this means Bitcoin is over. It remains the most liquid digital asset, with deeper order books and broader exchange coverage than any rival. Spot ETFs have made Bitcoin a permanent fixture in portfolios. And the very regulatory clarity now benefiting stablecoins may ultimately lift the entire ecosystem. More to the point, it’s survived existential crises: the Mt. Gox collapse, the China mining ban, the 2022 crash — and plenty others. Each time, the network endured and prices began to set new records. Resilience is not nothing. In an asset class littered with failures, simply surviving confers a kind of legitimacy.

“There’s always somebody spreading fear, uncertainty, doubt. There’s always a problem,” said Dan Morehead, founder of Pantera Capital. “I just think it’s a natural desire of people who are skeptical on how important cellphone-based money is to the world, that they always come up with something new to worry about.”

The bull case isn’t that Bitcoin’s narratives are invincible. It’s that they don’t need to be — just durable enough to outlast each successive crisis of confidence. And history, so far, is on their side.

The drift

But history also shows that survival and relevance are not the same thing. Bitcoin’s greatest threat isn’t a competitor — it’s drift. The slow bleed of attention, capital and conviction that comes when no single narrative can hold. The asset still exists. The network still runs. But the stories that gave Bitcoin its gravitational pull — digital gold, freedom money, institutional reserve — are fraying simultaneously. Whether that’s a temporary crisis or permanent is one of the biggest questions in the digital-economy era.

“It’s like a religion for many, and religious faith is hard to shake,” said Michael Rosen, chief investment officer of Angeles Investment Advisors. “It’s just not my religion.”

© 2026 Bloomberg

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