The major drivers of Bitcoin's rally to an October peak are actually liable for sending the value to multi-month lows, with crypto treasury moves and crypto fund outflows pointing to “actual capital flight” slightly than purely negative sentiment, NYDIG says.
Greg Cipolaro, head of research at NYDIG, said in a note on Friday that exchange-traded fund (ETF) inflows and digital asset treasury (DAT) demand are critical to Bitcoin's (BTC) final cycle.
However, Cipolaro said a big liquidation event in early October led to a reversal in ETF inflows, a collapse in Treasury premiums and a decline in stablecoin supply, suggesting liquidity is leaving the system. In “classic signs” the loop “loses momentum”.
“Historically, once this cycle is broken, the market tends to follow a predictable progression. Liquidity becomes tighter, leverage attempts to regroup but struggles to achieve traction, and previously supportive narratives not translate into actual flows.”
“We've seen this in every major cycle. The story changes, however the mechanics don't. The reflexive loop drives the market higher, and its reversal sets the stage for the subsequent phase of the cycle,” Cipolaro added.
ETF capital is flowing out, but Bitcoin dominance is growing
Spot Bitcoin ETFs, which Cipolaro says have been the standout success story of this cycle, have turned from a reliable inflow engine “into a big headwind,” but a broader range of things, similar to global liquidity shifts, macroeconomic headlines, market structure stress and behavioral dynamics, are still influencing Bitcoin.
“Bitcoin's dominance tends to extend during cyclical declines as speculative assets are mined more aggressively and capital reconsolidates as essentially the most established and liquid asset within the ecosystem. We have seen this dynamic repeatedly and are seeing it again,” he said.
Bitcoin's dominance tends to extend during declines as capital reconsolidates into essentially the most established and liquid asset. Source: NYDIG
According to crypto data platform CoinMarketCap, Bitcoin dominance rose back above 60% in early November and has settled at around 58% since Monday.
DATs and stablecoins are falling
DATs and stablecoins have also been a very important source of structural demand for Bitcoin. However, Cipolaro said DAT premiums, where stocks trade relative to net asset value (NAV), fell across the board and stablecoin supply fell for the primary time in months, with investors appearing to withdraw liquidity from the ecosystem.
Even if the market downturn deepens, the DAT sector still has an extended method to go before actual stress becomes an issue, in response to Cipolaro.
“Importantly, while these reversals mark a transparent shift from a once-strong demand driver to a possible headwind, to this point no DAT has shown signs of economic distress.”
“Leverage stays modest, interest obligations are manageable and lots of DAT structures allow issuers to suspend dividend or coupon payments if vital,” he added.
Bitcoin’s long-term trajectory remains to be intact
Despite the recent decline, Cipolaro believes that Bitcoin's “secular story stays intact” because it continues to achieve institutional importance, government interest is slowly increasing, and its role as a neutral, programmable monetary asset stays very necessary.
“This long-term trajectory has not modified in recent weeks. But the cyclical story, driven by flows, leverage and reflexive behavior, is becoming rather more prevalent now,” he said.
“Investors should hope for the very best but prepare for the worst. If past cycles are anything to go by, the road ahead is prone to be bumpy, emotionally taxing and punctuated by sudden dislocations.”
