The Fed’s revised stance of fewer-than-expected rate cuts has spooked the markets, and Bitcoin (BTC) is no exception. It has given up some of its gains after a meteoric 150%+ run this year. There is a lot to cheer about going into 2025 – a favorable government stance, growing institutional interest, and of course the momentum (read Buy, Sell, Or Hold Bitcoin). A price of $150,000 isn’t out of reach. But as evident historically, the risk of an intermediate correction remains and has become more palpable after the recent Fed announcement.
This was clearly felt in the markets with NASDAQ dropping -3.5%, and can weigh down risky assets such as Bitcoin in the near term. The risk to this cryptocurrency is further magnified by increasingly leveraged positions, lack of intrinsic value, and susceptibility to market manipulation due to limited supply. A 20% correction from current levels is not out of the question. Bitcoin has substantial upside, but it comes with its fair share of risks. If you want upside with a smoother ride than crypto, consider the High Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception.
Leveraged Positions & History Of Panic Driven Crashes
Bitcoin positions are heavily leveraged which magnifies its price volatility. When things go bad, leveraged positions are usually liquidated first to cut losses, causing a cascading effect. Recently, Bitcoin positions worth over $2 billion were liquidated in a day causing a 6% drop in price. Covid was another reminder of the negative side of leverage as Bitcoin’s price crashed roughly 50% around the onset of the pandemic. The Estimated Leverage Ratio, which reflects the average leverage used by traders, increased 37% between February and October 2024. Open Interest in Bitcoin futures jumped to a historic high of $63 billion in November 2024.
Leverage is a double-edged sword that considerably increases the downside risk of an asset and there is sufficient historical evidence for this. Between December 2017 and 2018, Bitcoin’s leverage magnified its crash as the bull market run ended, leading to a price fall of 80%. In 2020, as COVID struck down global markets including cryptocurrencies, Bitcoin’s sharp price decline forced heavy liquidation of leveraged positions, as much as $1 billion in a day. Roughly a year later, China’s crackdown on Bitcoin Mining triggered another price fall. In November 2022, there was yet another crash triggered by Almeda Research’s and FTX’s insolvency-driven liquidity crises.
The added selling pressure on leveraged positions hinders investors’ ability to ride the bearish market periods. The liquidation of such positions often triggers a cascading effect leading to a price crash. As amazing as cryptocurrencies have been in terms of returns over the years, consistently beating the broader markets — in good times and bad — is a difficult task. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
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