Bitcoin Under Mounting Pressure as Leverage Unwinding Continues and Bubble Concerns Intensify
| Bitcoin is holding steady after steep losses earlier today, when it came close to the $108,000 level. Major altcoins were hit even harder over the past two sessions, with Ethereum losing 8% yesterday after having reached a record high late on Sunday.
Bitcoin’s consecutive declines come amid a renewed wave of leverage reduction in the market, which had flared up again following last Friday’s gains. According to CoinGlass data, more than $1.6 billion worth of futures long positions have been liquidated since Friday, with Bitcoin accounting for nearly $470 million of these liquidations. Friday’s sharp rally following Jerome Powell’s remarks appeared to entice buyers back into building up their positions. However, their failure to maintain control quickly deepened losses and triggered a new chain reaction of liquidations. A similar episode unfolded roughly two weeks ago when the shocking U.S. Producer Price Index figures hit an already overleveraged crypto market. While the current pullback seems to fall within the framework of a correction, supported by relatively favorable market fundamentals, Bitcoin faces risks unique to itself that could weigh heavily on investors’ minds. According to Bloomberg, Bitcoin’s decline also comes amid surging momentum around Ethereum. After briefly falling near $1,400, the world’s second-largest cryptocurrency has since reclaimed all the losses from 2021, hitting fresh highs above $4,900 on Sunday. Ethereum’s outperformance, coupled with mounting institutional adoption, has bolstered its dominance in the crypto market at the expense of Bitcoin. Bitcoin’s market cap share has dropped from about 66% at its peak earlier this year to around 60%, while Ethereum’s dominance has doubled from 7% to over 14%. Adding to Bitcoin’s headwinds are growing concerns about the risks tied to large Treasury firms in the crypto space, raising fears of a potential bubble that would not burst in the faces of meme coins or NFTs, but rather the world’s first and largest cryptocurrency. According to the Wall Street Journal, companies such as Strategy face significant risks due to their reliance on attracting investors willing to pay inflated premiums for Bitcoin exposure. The company’s shares currently trade at a roughly 35% premium compared to Bitcoin itself where investors could acquire much more cheaply either directly or through spot ETFs. While such firms can retain investor interest as long as bullish momentum persists, history shows that these premiums ultimately collapse, leaving latecomers highly exposed. Strategy’s heavy reliance on leverage exacerbates the downside risks. Its massive Bitcoin purchases already exert direct influence on the coin’s price, meaning any forced liquidation to meet debt obligations could trigger sharp declines, The Journal noted. Patrick Jenkins, deputy editor of the Financial Times, compared the narrative surrounding Bitcoin Treasury firms to the buildup before the 2008 global financial crisis, when the collateralized debt obligation (CDO) bubble imploded. Although these warnings are not new, they align with a potentially troubling trajectory for both Bitcoin and Strategy’s stock (MSTR). Despite favorable fundamentals across equities and crypto, the company’s multiple-to-net asset value (mNAV) has been in steady decline, which can be a sign that the premium its shares command over Bitcoin has been shrinking even as prices rise. If this trend continues until the premium fully evaporates, Strategy could face serious challenges in meeting its debt payments and exceptionally high preferred dividend obligations. The company frequently issues common stock to cover its funding needs. The worst-case scenario would see the premium fall to parity or below, removing investors’ incentive to buy shares instead of Bitcoin itself or spot ETFs. While such a scenario is not guaranteed, it cannot be dismissed given the multiple potential triggers, whether from a loss of confidence in the firm to a broader equity market downturn. Losing the ability to issue common stock could ultimately force Strategy to sell Bitcoin in order to meet its debt obligations and dividend payments — even if they are avoidable — to prevent its preferred shares from collapsing. With the company holding more than 630,000 Bitcoin, representing roughly 3% of the total maximum supply, any such sale could ignite the spark of a wider collapse.Written by Samer Hasn, Senior Market Analyst at XS.com |
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