Bitcoin, gold sound liquidity alarm

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Bitcoin has once again experienced a roller-coaster market. On October 6, Bitcoin soared to a historic peak of $126,251, but just four days later, U.S. President Trump’s unexpected remarks on tariffs triggered volatility in global markets, and Bitcoin subsequently began a downward trend.  

On November 17, the cryptocurrency bear market intensified further. Bitcoin fell below $94,000, erasing all its gains since the start of this year and plunging by more than 25% from the record high reached on October 6.  

Wang Peng, an associate researcher at the Beijing Academy of Social Sciences, told the *21st Century Business Herald* that the core reason for Bitcoin’s sharp correction and the erasure of its annual gains lies in the marginal tightening of U.S. dollar liquidity. Expectations for Federal Reserve policies have shifted, market expectations for interest rate cuts have cooled, and the rise in capital costs has directly impacted high-volatility assets. Institutional investors have been forced to reduce leveraged positions, intensifying selling pressure. At the same time, the Trump administration’s narrative of supporting cryptocurrencies has gradually lost effectiveness. Tighter global regulation has shattered the illusion that "cryptographic assets are absolutely safe," and the market has realized that Bitcoin can hardly play the dual role of speculation and risk hedging, leading to a cooling of expectations for policy dividends.  

An "abnormal" phenomenon behind the sharp drop of Bitcoin (a risky asset) in this round is that gold, also a risk-averse asset, has fallen simultaneously. Ding Yuan, Dean of the New Fire Research Institute, told the *21st Century Business Herald* that the recent simultaneous decline of risky assets (such as U.S. stocks and cryptocurrencies) and traditional safe-haven assets (such as gold) is a warning signal worthy of vigilance. This usually occurs in extreme environments where systemic contraction of market liquidity and widespread capital tightness take place.  

Does the simultaneous decline of risky assets and safe-haven assets hide signals of a greater crisis?  

## Bitcoin Erases Annual Gains  

This year, which was supposed to be a year of repeated record highs for Bitcoin, has seen a sudden reversal since the fourth quarter, with Bitcoin having erased all its gains since the start of the year.  

Zhao Wei, a senior researcher at the OKX Research Institute, told reporters that Bitcoin has fallen continuously recently. In the short term, this is mainly the result of the combined effects of tight macro liquidity, declining market risk appetite, and cyclical factors within the crypto industry. Although Bitcoin climbed to a new all-time high in early October, the market later lacked sustained capital inflows. High-leverage positions were gradually unwound after the rally, and coupled with tightening external liquidity, obvious selling pressure was formed.  

Since then, uncertainties about the outlook for U.S. fiscal and monetary policies have also heightened traders’ wait-and-see sentiment. Both risky assets and safe-haven assets have come under overall pressure, with simultaneous declines in U.S. stocks, gold, and cryptocurrencies.  

Overall, Bitcoin’s erasure of this year’s gains is the result of multiple overlapping factors. In Ding Yuan’s view, the core of this round of decline lies in the triple pressure from macro expectations, capital flows, and market sentiment:  

1. **Fluctuating macro expectations**: The market has been uncertain about whether the Federal Reserve will cut interest rates again in December, leading to a decline in market risk appetite.  

2. **Capital pressure**: Recently, cryptocurrency ETFs have seen continuous net outflows, and some institutions and entities related to DAT (Digital Asset Custody) have also slowed down their allocation pace. Spot ETFs for Bitcoin and Ethereum have mainly seen redemptions in the short term, and the market lacks support from external capital inflows.  

3. **Psychological trauma**: After the most severe liquidation event in history on October 11, market sentiment was severely hit, on-exchange deleveraging accelerated, and the position volume of derivatives declined. Liquidity recovery has been slow, and overall trading willingness has weakened.  

It is worth noting that after this round of sharp decline, Bitcoin has given back all the gains it made since Trump took office. Ding Yuan said that most policies have been digested by the market within the year, such as the strategic Bitcoin reserve and the advancement of stablecoin legislation. The long-term direction of the U.S. to promote the development of the crypto industry has not changed, and stablecoins, tokenized securities, and a more complete compliance framework are still being advanced.  

Previously, the market had high expectations for potential crypto policy benefits from the Trump administration, especially some of its early regulatory policies, which made some traders expect the government to continue or even strengthen support for the crypto industry. However, Zhao Wei warned that as there has been a lack of new, sustained, and clear positive factors subsequently, and coupled with changes in the results of recent U.S. local elections and relevant policy signals, this expectation has gradually weakened among some market participants.  

In Zhao Wei’s view, this change sends two signals: First, expectations for policy-driven market trends need to focus on sustainability and implementation, and whether more capital inflow channels can be opened; second, the price of crypto assets is increasingly dependent on the macro environment, and at the same time, their linkage with the global financial market is also strengthening.  

## What Will Happen to the Market Outlook?  

For most of this year, institutions have been the core support for Bitcoin’s price. However, it is necessary to be vigilant that institutional capital has also flowed out recently.  

Zhao Wei analyzed that in the upward trend of Bitcoin’s current cycle, institutional capital has always been an important support for Bitcoin’s price, and they have provided stability to the market through continuous allocation. However, recently, as macro liquidity has tightened, U.S. stocks and other risky assets have come under pressure, and political and policy uncertainties have increased, some institutions have chosen to temporarily exit the market, leading to a significant short-term correction of Bitcoin. At the same time, the unwinding of high-leverage positions and fluctuations in market sentiment have also intensified short-term selling pressure.  

Amid the interweaving of bullish and bearish factors, Bitcoin’s short-term price may continue to fluctuate under the influence of macro liquidity and the policy environment. However, from a longer-term perspective, Zhao Wei believes that the foundation of the Bitcoin market still exists. The global trend of asset diversification, the continuous increase of long-term funds, and the improvement of institutional participation have laid the foundation for Bitcoin’s potential upward movement in the future.  

In Ding Yuan’s view, in the long run, Bitcoin still has potential in the narrative of hedging against inflation, currency depreciation, and political turmoil, but it will take time to become a mainstream asset. The recent decline cannot completely negate its long-term value; instead, it is a process of the market "separating the wheat from the chaff."  

The institutional allocation of Bitcoin, the maturity of ETF channels, the improvement of the compliance framework, and the structural demand for payment and on-chain financial penetration still exist. Ding Yuan believes that these are the core driving forces supporting the long-term development of mainstream assets. Currently, many correlation indicators are at historical lows, so short-term excessive panic should not affect long-term position allocation. The long-term risk-return of mainstream assets is still dominant, and its narrative of hedging against some risks is expected to be gradually accepted by the market under a more mature compliance framework.  

There are also a series of challenges in the future. Institutional capital is the core support for Bitcoin’s price, but the recent net outflows of ETFs have exposed the fragility of its narrative logic. Wang Peng analyzed that under the dual pressure of profit-taking demand and regulatory uncertainty, institutions have been forced to reduce their positions. Bitcoin’s narrative of hedging against inflation is facing challenges: its price volatility is far higher than that of gold, and it is highly synchronized with U.S. stocks, making it difficult to independently hedge risks. In the future, Bitcoin needs to complete the narrative reconstruction from a speculative tool to a store of value and break through the two major bottlenecks of regulatory compliance and technical trust: the differentiation of global regulatory policies may restrict market expansion, and if the security of the blockchain cannot resist attacks, its value foundation will be shaken.  

Since its surge of more than 13,000% in 2017 brought it into the mainstream spotlight, Bitcoin has been stuck in a cycle of sharp rises and falls. After setting a record that year, it plummeted by nearly 75% the following year.  

In Wang Peng’s view, Bitcoin’s sharp ups and downs are a stress test of the financial market on the decentralized monetary system. Its price fluctuations not only reflect changes in liquidity but also reveal the fragility of the traditional financial system. If Bitcoin wants to become a mainstream asset in the future, it needs to complete narrative reconstruction, and this process may be accompanied by more violent market fluctuations and regulatory games. For investors, understanding Bitcoin’s "mirror attribute"—being both a risk amplifier and a crisis early warning indicator—is the key to coping with uncertainty.  

## Both Risky Assets and Safe-Haven Assets Fall  

It is worth noting that while Bitcoin (a risky asset) has plummeted, gold (a safe-haven asset) has also fallen simultaneously.  

Wang Peng analyzed to reporters that the core reason for the failure of the traditional risk-avoidance logic is the tightness of U.S. dollar liquidity. Investors have been forced to sell all assets to obtain cash, resulting in collective pressure on prices. The strong performance of the U.S. Dollar Index has further intensified this trend, attracting international capital to flow back to the United States and putting pressure on the prices of emerging market assets. If the Federal Reserve maintains a hawkish policy, the liquidity crisis may spread to a wider range of financial fields, triggering systemic risks such as corporate debt defaults.  

Michael Armbruster, co-founder and managing partner of futures broker Altavest, also said that in the short term, as investors seek liquidity, gold may fluctuate in sync with other risky assets.  

After Michael Burry, the prototype of the movie "The Big Short" and a legendary investor, shorted Palantir Technologies, market concerns about the AI bubble have lingered. Adrian Ash, Director of Research at BullionVault, pointed out that if the AI sector continues to be sold off, at least in the short term, investors who try to use gold to hedge against risks in tech stocks may be disappointed.  

Currently, the positive correlation between risky assets and safe-haven assets means that investors who have suffered losses in the stock and cryptocurrency markets are eager to make up for the losses by realizing gains from gold. Matthew Hougan, Chief Investment Officer of Bitwise Asset Management, said that the overall market is in a state of risk aversion, and cryptocurrencies are the "canary in the coal mine"—the first assets to fluctuate.  

Driven by the pursuit of returns, many investors will use the so-called "safe-haven assets" to replace cash. However, when liquidity contracts, these assets will also be forced to be sold to withdraw cash. In the case of tight liquidity, the market will "treat all assets equally." Therefore, the correlation between the prices of various assets has increased recently, and they have fallen simultaneously. Ding Yuan told reporters that this indicates that the market is experiencing a deeper liquidity stress test. What can truly hedge risks in extreme market conditions are cash equivalents such as cash, short-term treasury bonds, and money market funds—highly liquid assets that can be converted into cash at any time.  

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