Why did the crypto market drop?
There’s never a dull moment on the blockchain. Here’s what you need to know this week:
Bitcoin saw its steepest drop of the year. A closer look at what triggered the downturn and what analysts are saying.
Wall Street is doubling down on crypto tech. From stablecoins to tokenization, institutional players are expanding their crypto footprints.
Stablecoins sent on Ethereum just hit a new record. And more key stats from around the cryptoverse.
MARKET BYTES
Volatility shakes crypto markets after biggest 24-hour liquidation event in history
Just last week, BTC was celebrating yet another all-time high (breaking $126,000) and ETH was close to a record of its own (climbing to around $4,750). The good times didn't last for long, however, and by Friday markets were in the midst of a historic 24-hour crash, with around $19 billion in leveraged positions liquidated — far eclipsing the wipeouts triggered by the pandemic in 2020 and FTX’s collapse in 2022.
By Saturday, BTC had fallen below $106,000, ETH had fallen to about $3,700, and a wide range of smaller tokens were down by double-digit percentages. Bitcoin rebounded to around $116,000 on Monday, but has continued to see volatility in the days since. On Wednesday morning, BTC was around $111,000.
What’s been shaking markets? Here’s what you need to know…
What triggered the market drop?
In last week’s Bytes, we explained the concept of perpetual futures (or perps), which have become a hugely popular way for traders to speculate on the price movements of assets — like bitcoin, ether, or other cryptocurrencies — without needing to buy the underlying assets themselves.
Why would a trader prefer to buy perps, as opposed to simply buying BTC or some other token? In part because perps platforms offer leverage of 10x or more, allowing a trader with 1 BTC, for instance, to make a 10 BTC trade.
If the trade goes the right way, the gains are amplified. But the risks are also amplified: If the trade goes the wrong way, the entire position can be automatically liquidated by the perps platform. (Compare this to a typical BTC HODLer, whose position may lose value during a downturn, but still remains open to future price movements.)
So how does all of this apply to the market drop? One precipitating factor for the current market turbulence was the White House’s Friday announcement of plans to raise tariffs on Chinese goods to 100%, after China announced new restrictions on exports of rare earth minerals that are key to many U.S. industries. (The American and Chinese governments are currently negotiating and it remains unclear what will actually stick.)
In response to the news, crypto markets began to dip rapidly, and leveraged bets started to get liquidated. As the liquidations mounted, markets fell further, driving more liquidations in a vicious cycle that ultimately resulted in at least $19 billion in perps (and other derivative trades) evaporating in a single day.
Quick dip… “The flash crash in token prices caused collateral values to plummet momentarily, triggering massive liquidation cascades,” Marcin Kazmierczak, co-founder of crypto oracle provider RedStone, told Decrypt. “Roughly 1.6 million traders saw their positions evaporate. Even positions that might have survived a more gradual price decline were wiped out in seconds as exchanges’ liquidation engines worked through overleveraged positions.”
How have BTC and ETH fared during this downturn?
On Monday, following the weekend’s liquidation storm, crypto ETFs saw a combined $755 million in outflows, according to SoSoValue data — with BTC ETFs losing $326.52 million and ETH ETFs shedding $428 million.
As of Wednesday, BTC was down around 12% from last week’s all-time high and ETH was down around 18% from its August all-time high.
Why did ether experience a bigger relative swing? In part because it had been outperforming bitcoin recently, with prices buoyed as ETH-related protocols grew in prominence on Wall Street (more on this below) and Ethereum treasury companies like BitMine purchased billions of dollars worth of ETH in recent months.
Risk off… “The punishment is largely due to ETH’s recent outperformance and to the fact that it is more volatile than BTC,” Noelle Acheson, author of the Crypto is Macro Now newsletter, told Bloomberg. “If investors have to lighten crypto holdings in a risk-off move, they’re more likely to sell ETH than BTC.”
What about altcoins?
Altcoin markets were by far the hardest hit, with some smaller tokens falling as much as 80% before starting to recover. DOGE dropped by around 50%, and XRP fell around 42%.
Smaller tokens accounted for approximately $131 billion of the $380 billion erased from crypto’s market cap, according to 10x Research.
Bigger dipper... “The selloff began as risk appetite across markets weakened, but altcoins fell harder due to their inherent fragility,” noted Bloomberg. “Many are thinly traded, lack real buyer depth, and rely heavily on a small group of players to stabilize prices. When selling pressure intensifies, those buyers often pull back, leaving tokens exposed to rapid price moves.”
WHALE STREET
Despite volatile markets, institutional finance still loves blockchain tech
Crypto’s volatility might be the big story of the week. But despite the market’s short-term turbulence, many of the world’s most powerful financial institutions are continuing to make long-term investments in crypto and blockchain technology.
This week, the world’s biggest asset manager pledged to play “a larger role” in bringing traditional finance onchain. “It is our belief that we need to be moving rapidly [on tokenization],” said BlackRock CEO Larry Fink during an earnings call. “We need to be tokenizing all assets.”
Meanwhile, many of the world’s biggest banks are plotting to release their own stablecoins; SWIFT, the network that banks use to communicate with each other, is building its own blockchain; and the crypto IPO boom is showing no signs of slowing down.
Big banks increasingly want their own stablecoins
Last week, a group of 10 of the world’s largest banks (including Bank of America, Citi, Goldman Sachs, and Deutsche Bank) confirmed that they’re working together on a stablecoin product.
The news came just weeks after a separate group of nine Europe-based banks announced plans to collaborate on a euro-denominated stablecoin.
The planned token from Bank of America, Citi, and others would be, according to the consortium, “a 1:1 reserve-backed form of digital money that provides a stable payment asset available on public blockchains, focused on G7 currencies.” (The G7 nations are the U.S., Canada, the U.K., Japan, Italy, Germany, and France.)
“The objective of the initiative is to explore whether a new industry-wide offering could bring the benefits of digital assets and enhance competition across the market, while ensuring full compliance with regulatory requirements and best practice risk management,” said the group of 10 banks in a statement.
Around 99% of the overall $304 billion stablecoin market cap is denominated in the U.S. dollar; this summer, France's Societe Generale became the first major bank to release its own dollar-backed stablecoin.
Stablecoins have garnered much attention from Wall Street this year, especially after the U.S. passed the GENIUS Act, which established a formal legal framework for stablecoins.
The crypto IPO boom isn’t over yet
Securitize, a leading real-world-asset tokenization company, is considering hitting public markets via a SPAC merger. (Tokenization is the process of putting pretty much any real-world asset on blockchains and is seen as one of the biggest potential use-cases for crypto.)
Securitize oversees more than $4.6 billion in tokenized assets, including BlackRock’s $2.8 billion onchain U.S. treasury fund. The firm, which has received venture funding from BlackRock, Coinbase Ventures, and others, could still opt to remain private. But if the company does go public, it would join firms including USDC-issuer Circle (which went public in June and saw its share price rise as much as 700% following its IPO); blockchain lending company Figure; crypto exchanges including Bullish; and crypto-investment firm Galaxy Digital.
Most financial transactions could eventually run on blockchains
One of the fundamental rails in the current financial system, the Society for Worldwide Interbank Financial Telecommunication (better known as SWIFT), is working with dozens of institutions including JPMorgan, HSBC, and Bank of America, to build a blockchain focused on 24/7, real-time payment settlement.
SWIFT’s network directs trillions of dollars in transactions, and the goal of the blockchain, according to Bloomberg, is to allow financial institutions to use SWIFT for digital-asset transactions including stablecoins, tokenized deposits, or other types of tokenized assets.
“In conversation with these institutions, you clearly feel that the moment is now to bring the collaboration together,” said Thierry Chilosi, Chief Business Officer at SWIFT.
Google is also building a blockchain aimed at financial institutions that can run Python-based smart contracts. The Google Cloud Universal Ledger, which is currently in testnet, could provide a “neutral” infrastructure layer that can connect billions of users. “Tether won't use Circle's blockchain, and Adyen probably won't use Stripe's blockchain,” said Rich Widmann, Head of Web3 Strategy at Google Cloud. “But any financial institution can build with GCUL.”
And last month, Canton, an institutional focused blockchain firm, announced a partnership with Chainlink aimed at boosting institutional adoption for the network, which secures over $6 trillion in tokenized real-world assets.
As for BlackRock, the firm is working hard on what the company’s CEO has described as a $110 trillion opportunity. “I do believe we have some exciting announcements in the coming years on how we could play a larger role on this whole idea of the tokenization and digitization of all assets,” Fink said this week. “We're spending a great deal of time on the tech. I'm trying to develop our own technology related to this."
NUMBERS TO KNOW
1 million
Number of crypto addresses that sent stablecoins on the Ethereum network last week, reaching record highs as the market cap for stablecoins has grown past $300 billion.
202,000
Amount of ETH (worth roughly $800 million) that publicly-traded BitMine bought last week during the market turbulence, extending its lead as the largest corporate ETH holder, with about $11 billion of the asset. “The crypto liquidation over the past few days created a price decline in ETH, which BitMine took advantage of,” noted chairman Tom Lee.
1%
The percent of Luxembourg's Intergenerational Sovereign Wealth Fund that will be allocated to bitcoin ETFs. The move makes the country the first in the Eurozone to gain sovereign exposure to bitcoin exchange-traded funds.
TOKEN TRIVIA
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