Bitcoin's Recent Decline (and What Comes Next)

Dear subscriber,

Crypto has gotten pummeled...

Bitcoin has fallen from roughly $120,000 in early October to around $95,000 today. Ethereum – the second-largest crypto behind bitcoin – is down to $3,100 after reaching an all-time high of about $4,950 in August.

True bitcoin "holders" have become accustomed to the volatility.

The crypto's recent rally had, for some, put risk in the rearview mirror. Bitcoin seemed to only climb upward.

Now, its 20% decline has believers wondering if this is the end of a long bull run.

However, digging deeper, you can see that the reasons for bitcoin's decline are the very same reasons for its rise.

And that lets us know that bitcoin's rise is far from over...

The Fundamentals Are Still There

Bitcoin had a great 2025 thanks to dramatically improving fundamentals.

Of course, as a longtime stock analyst, I often say that bitcoin doesn't have any real fundamentals. It doesn't have earnings or cash flow or any true intrinsic value to hang your financial analysis on.

But bitcoin does have real, fundamental drivers that pushed it higher this year. I'm referring to the political environment and bitcoin's growing acceptance in the established financial world.

Immediately after President Donald Trump's election win, I became long-term bullish on crypto.

Trump had promised to make America the "crypto capital of the world."

And at the time, the unclear regulatory environment maintained by the Biden administration had hung over crypto like a dark cloud. So any sort of clarity under the Trump regime had the potential to send cryptos soaring.

Aside from the sideways action we saw during Trump's tariff tantrum last spring, that call has been spot-on. Bitcoin rose from around $70,000 prior to the election to more than $120,000 in October...

On the financial side, opportunities to invest in bitcoin through exchange-traded funds expanded. Major investment firms started making allocations to bitcoin. And governments talked about establishing national bitcoin reserves.

But it wasn't just fundamentals that drove bitcoin higher.

It was also leverage. And leverage is what caused this month's crash...

Borrowing to Buy Bitcoin

Financial markets aren't driven by just buyers and sellers. They're also driven by borrowers.

When assets boom, excited investors use margin and leverage to amplify returns. They do it with stocks and bonds. And they do it with bitcoin.

Leveraged bets on bitcoin rose dramatically over the past year.

International exchanges had long offered futures contracts as a way to make levered bets on cryptos. And lighter regulations led even more conservative, U.S.-based exchanges like Coinbase Global (COIN) to offer the same.

Starting in July, you could trade bitcoin futures in a Coinbase account and leverage your bitcoin 10 times over.

International exchanges let traders leverage their bitcoin by as much as 125 times. And certain decentralized exchanges even offered more than 1,000 times leverage.

Traders took advantage. According to data from CoinGlass, bitcoin's "open interest" – a measure of all outstanding futures contracts – exploded from just $20 billion at the start of 2024 to a peak of $94 billion in October...

Now, leverage increases the volatility of an asset. It magnifies moves up and magnifies moves down. And it can lead to a spiral of selling if traders get surprised by a decline in price.

For example, at 10 times leverage... if bitcoin rises $1,000, you make $10,000.

However, if bitcoin falls $1,000, you lose $10,000.

When those kinds of losses hit, traders need to sell to get out of their losing bets. If the losses are big enough, they can get automatically liquidated – forcing traders to immediately sell their positions.

That's how leverage creates a downward spiral. Losing traders get liquidated as their positions lose value, which increases the selling pressure and sends prices down further.

As of this week, open interest in bitcoin is down to around $67 billion – a six-month low – as traders pull back from their leveraged positions.

But there's more...

The Major Bitcoin Buyers Are Backing Down

We covered crypto treasury companies in July.

These are publicly traded stocks like Strategy (MSTR) – formerly known as MicroStrategy – that buy and hold bitcoin and other cryptos.

The magic of these companies at the time was that they traded at a premium to the value of their holdings. In July, for instance, Strategy held $70 billion in bitcoin... but its stock had a market cap of $120 billion.

With that premium, it makes financial sense for the company to sell stock in the market and use the cash to buy more bitcoin. And Strategy did that continually, making it a major buyer of the crypto.

As of last month, Strategy had amassed 641,000 bitcoins, or 3% of all existing bitcoin.

More than 100 companies have copied the strategy to varying degrees. All told, they own more than 1 million bitcoins.

These treasury companies have driven the price of bitcoin up dramatically.

However, I warned in July that the premiums they were trading at were at risk of eroding. And that's exactly what happened...

As bitcoin started to decline, investors backed away from the treasury companies, and their premiums collapsed.

Of course, the treasury play only works if these companies trade at a premium to their holdings. If they instead trade at a discount, the proper move is for them to sell bitcoin to buy back shares.

As of this writing, Strategy's premium has declined to just about zero. Its market cap matches its bitcoin holdings. And many of the less popular treasury companies trade at a discount today.

As I warned in July...

If bitcoin falls, that premium declines. And if these companies are short on cash and need to pay their debts, they'll have to sell their bitcoin. But if bitcoin is worth less, they'll have to sell more. That selling pushes the price of bitcoin lower... and the cycle continues.

So not only are these bitcoin treasury companies leveraged bets on the price of bitcoin, they have the potential to create a downward spiral in the price of bitcoin.

From January through September, publicly traded bitcoin companies bought nearly 50,000 bitcoins per month. Since the start of October, they've bought only 11,000 bitcoins.

Pair the deleveraging with the evaporation of major buyers... and you get a violent correction.

The question is...

What Happens Next?

Well, to start, the bitcoin leverage cascade appears to be over.

Much of the leverage has come out of the system. The number of liquidations has declined to near zero. And bitcoin's rapid decline has mostly cooled – which is a sign that the forced selling has stopped.

That's bullish for bitcoin. And for long-term bitcoin holders, I'm confident this pocket of violent selling has run its course.

Now, there is another worry hanging over bitcoin – and that's its tendency to behave like a speculative tech stock.

Despite its promise as a store of value and a type of "digital gold," bitcoin tends to rise when investors are feeling speculative... and fall when stocks fall.

It hasn't yet offered investors diversification against broader market moves. Instead, it amplifies them.

For the most part, bitcoin and the tech-heavy Nasdaq Composite Index move in tandem...

As we've covered, the market is largely being driven by AI and AI-related tech stocks today.

There's real risk that the AI bubble will burst. And while bitcoin's leverage-driven decline looks over, it's still in danger of getting caught in a broader market decline.

There's one more wrinkle...

One key reason to own bitcoin is to protect against the ongoing debasement of the U.S. dollar. It's the same reason we like to own gold today.

As you can see below, the U.S. Dollar Index – which measures the performance of the dollar against a basket of foreign currencies – has gotten hammered for most of the year, while bitcoin (and gold) has soared.

But the dollar has staged a bit of a bounce-back rally since mid-September, moving opposite to bitcoin...

That said, all the reasons for the dollar "debasement trade" – inflation, rising national debt, and challenges to America's place in the global financial system – still remain. So it makes sense to be bullish on gold and bitcoin.

In sum, you should continue to use caution in the face of a market that feels this frothy. But the tailwinds that have driven bitcoin higher are still there.

As we've covered, bitcoin's leverage-driven decline seems to have come to an end... The fundamentals are intact, as regulation and financial markets favor a bright future for bitcoin... And the debasement of the dollar will likely continue as inflation rages and interest rates head lower.

All that is reason to believe that bitcoin still has plenty of room to run.

To hear more about the recent action in bitcoin – and how it could lead to a huge "buy the dip" opportunity for investors – check out today's This Week on Wall Street video.

You can watch the entire episode on our YouTube page by clicking the image below. Be sure to like and subscribe to get more of our videos.

What Our Experts Are Reading and Sharing...

• Michael Burry – The Big Short investor famous for making nearly $800 million off the housing crisis – is shutting down his hedge fund, Scion Asset Management. Burry recently made big short bets on Palantir Technologies (PLTR) and Nvidia (NVDA). Now, as he claims his "estimation of value" may no longer be in tune with the market... he's on to "much better things."
• Anthropic's Claude was used by Chinese hackers in a large-scale cyberattack in September. They directed Claude to automate thousands of attacks on major corporations – at a rate no human can do. Anthropic noticed the activity and stopped it. (Russian hackers have attacked Ukraine with a similar method.)
• The World Energy Outlook from the International Energy Agency has global electricity demand growing by 40% to 50% by 2035. Less than 10% of that growth is due to AI and data centers. Much of it is driven by population growth and increased demand for cooling.

New Research in The Stansberry Investor Suite...

This is exactly the time you want to invest in high-quality businesses.

It may not feel like it... seeing as for much of this year, bad stocks have outperformed the broader market.

By "bad stocks," I mean those with low earnings and poor balance sheets. In this bull market, people are deciding to buy and bid up the junk – everything from speculative AI plays to meme stocks.

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We know that over the long term, from two years to two decades, quality businesses win out. The companies with fortress-like balance sheets, wide margins, and reasonable valuations are the ones that build and protect your wealth.

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That's part of why it earns a Stansberry Score of 88 – making it the 32nd-best stock out of the more than 4,000 stocks we track.

Stansberry Investor Suite subscribers can read the entire report here.

If you don't already subscribe to The Stansberry Investor Suite – and want to learn more about our special package of research – click here.

Until next week,

Matt Weinschenk
Publisher and Director of Research

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