Rebound fails to hide the downtrend: Bitcoin records largest monthly drop since Terra crash, does "extreme fear" suggest the decline isn't over?

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On Sunday, cryptocurrencies rebounded, with Bitcoin breaking through $86,000 per coin, up 1.63% on the day; Ethereum touched $2,800 per coin, up 1.11% on the day. But this rebound is hard to mask the brutal slump of this month—Bitcoin is experiencing its worst month since the 2022 Terra crash.

Last Friday, Bitcoin once fell to a low near $80,500, with its market value evaporating by about $500 billion. This is the first time the cryptocurrency market has faced such a large-scale stress test after exchange-traded funds (ETFs) brought Wall Street and retail investors into the market.

Investors are withdrawing billions of dollars from the 12 Bitcoin-related ETFs. According to Bloomberg, the digital asset "treasury companies"—publicly listed shell firms set up solely to hold tokens—have experienced even greater outflows, and the market is beginning to question the value of these corporate structures.

Bitcoin still remains up about 50% since Trump’s victory last November, but much of its gains in what Trump calls the “golden age” of cryptocurrencies during his first year in office have evaporated. For cryptocurrencies that are now deeply integrated with Wall Street and public markets, this decline reveals an even more fragile ecosystem.

The Flash Crash in October Set the Stage for Trouble

The clear trigger for this round of decline was the flash crash on October 10. On that day, $19 billion in crypto bets were liquidated within hours, driving Bitcoin down from the all-time high of $126,251 reached only days before.

Cantor Fitzgerald analysts Brett Knoblauch and Gareth Gacetta wrote in a Thursday report: "We believe that most of the crypto market’s drop stems from the events of October 10. It feels like some large players were forced to sell, since the impact of the 10/10 event on balance sheets may be far greater than initially expected."

This flash crash exposed the long-term problem of insufficient liquidity during weekend trading and the accumulation of excessive leverage on some exchanges. Coinglass data shows that last Friday, as the latest round of decline hit leveraged traders, about $1.6 billion in bets were liquidated across exchanges.

Liquidity issues have yet to be resolved, and market makers weakened by the flash crash have been unable to step in to support prices, keeping crypto market liquidity consistently low.

Wall Street Funds Exit, Crypto Treasury Model Faces Test

Unlike in the past, a new player in this crisis is the ETF. These funds did not exist during the last major cryptocurrency crash. Bloomberg data shows that investors have pulled billions of dollars from the 12 Bitcoin-related funds this month; previous buyers included Harvard’s endowment and several hedge funds.

Fadi Aboualfa, head of research at Copper Technologies, said: "What’s happened over the past two months is like rocket fuel, as if people were expecting a crash. That’s how institutional investors behave. They don’t just hold and do nothing; they don’t have that mindset. They rebalance their portfolios."

The wave of digital asset “treasury companies” has seen even more serious outflows; these publicly listed shells set up just to hold cryptocurrencies are facing questions about their value.

Many “treasury companies” are built on the belief that a public company holding only cryptocurrencies can have a value higher than the tokens it holds. This model echoes the over-leveraged lenders of 2022. If confidence collapses, forced selling may follow, as many companies’ token holdings are already underwater.

Adam Morgan McCarthy, Senior Research Analyst at blockchain data firm Kaiko, said: "When you see a medical device company or a cancer research company transforming into a crypto treasury company, that tells you what stage of the cycle you’re in."

Sentiment Hits Extreme Fear, Risks Continue to Build

Any remaining optimism within the industry appears to be quickly evaporating. According to CoinMarketCap data, last Friday the Crypto Fear & Greed Index scored 11 out of 100, deep in the “extreme fear” zone.

Chris Newhouse, head of research at Ergonia, a company focused on decentralized finance, said: "Panic sentiment has surged to relatively high levels, and the structural lack of demand in the spot market means there is a lack of natural buyers who would usually appear during major pullbacks."

It’s worth noting that the scale of Bitcoin’s pullback in this round is still much smaller than the 75% drop during the 2021-2022 bear market, suggesting that the pain may go far deeper. At that time, every downturn exposed another major player’s problems—from Celsius to BlockFi to Three Arrows.

Although there is no obvious collapse or scandal this time, some traders believe that the current decline is more about technical factors and confidence than systemic cracks. Moonwell lending platform founder Luke Youngblood said: "We’re not on the same downward path; overall macro conditions, government support, and a reduction in bad actors in the industry make today’s market more resilient. Even if there are still concerns ahead, the foundation being built for cryptocurrencies is more solid."

Risk Warning and DisclaimerThe market has risks and investment needs caution. This article does not constitute individual investment advice and does not take into account individual users’ specific investment objectives, financial situation, or needs. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular situation. Investing based on these is at your own risk. ```