Crypto – what’s driving the recent fallout?

The recent decline in cryptocurrency prices has unsettled parts of the market.

<<This article was first published by Franklin Templeton>>

I talked with Christopher Jensen, Director of Digital Asset Research and a Portfolio Manager in the Digital Asset Investment Strategies group, to share his views, which I present below. 

To Chris, Bitcoin’s move below US$80,000 – and its brief approach toward the 200-week moving average – appears less like a crypto-specific shock and more like a combination of macro risk-off dynamics and mechanical selling, once key technical levels were breached.

What is driving the selloff in cryptocurrencies?

• Macro conditions remain the primary driver. Uncertainty around interest rates, global liquidity and geopolitics continues to weigh on all risk assets. Crypto often reacts first to these shifts because it trades 24/7 and carries higher embedded leverage than traditional markets.
  
  
• Market structure amplified the move. Exchange-traded fund (ETF) outflows, the unwinding of futures and basis trades, and pockets of forced selling likely accelerated downside momentum once technical support levels broke. These dynamics can produce sharp price moves even in the absence of new fundamental information.
  
  
• Institutional behavior has been broadly rational and orderly. Rather than capitulating, institutions have focused on tightening risk controls, trimming gross exposure and prioritizing liquidity and quality. While some selling was clearly forced and technical in nature, it does not appear to reflect a widespread loss of conviction across institutional investors.

Is this a bear market or a healthy correction?

• In our view, this episode looks more like a valuation and positioning reset than a crisis.
  
  
• Unlike prior crypto bear markets, systemic failures, major insolvencies or breakdowns in core blockchain infrastructure haven’t driven the current breakdown. That said, deleveraging takes time. Historically, crypto downturns tend to resolve through exhaustion and consolidation, not immediate V-shaped recoveries.
  
  
• Recent price action suggests the market is still in that process, even if near-term stabilization emerges.

What does this mean for the broader blockchain ecosystem?

• Corrections are often constructive for the ecosystem.
  
  
• As speculative activity cools, attention tends to shift toward infrastructure and real-world use cases such as stablecoin settlement, derivatives infrastructure and early-stage tokenization. Over time, this environment tends to differentiate projects driven primarily by narrative from those delivering measurable economic benefits.
  
  
• While capital formation may slow in the near term, the longer-term outcome is often a more resilient and institutionally viable ecosystem.

Is the “digital gold” narrative for Bitcoin undermined?

• What the narrative is: The “digital gold” concept is a theoretical narrative suggesting Bitcoin could, over time, serve as a store of value similar to gold due to its fixed supply, independence from sovereign monetary policy, and global accessibility.

• What it is not today: In practice, Bitcoin has not consistently behaved like gold. It remains a relatively young and highly volatile asset and has tended to trade as a liquidity- and risk-sensitive asset, often moving with broader risk markets rather than acting as a defensive hedge.

• Why the gap exists:  Bitcoin’s price behavior reflects factors such as speculative participation, leverage, evolving market structure and a still-developing investor base, all of which differentiate it from traditional stores of value like gold.

• Longer-term perspective:  The “digital gold” narrative is best viewed as a long-term and contested hypothesis, dependent on broader adoption, deeper and more stable market structure, and reduced volatility. The current environment highlights that any evolution toward such a role remains incomplete and uncertain.

Investment implications

• Risk management remains paramount. We believe volatility is likely to stay elevated as leverage continues to clear, making position sizing and liquidity critical.
  
  
• Institutional tone remains constructive. Orderly de-risking suggests rotation and discipline, not structural abandonment.
  
  
• Favor patience over precision. For long-term investors, measured and patient dollar-cost averaging appears more appropriate in our view than attempting to time a single market bottom.
  
  
• Watch for potential stabilization signals. ETF flow normalization, easing liquidation pressure and improvements in sentiment and positioning metrics (e.g., fear/greed, technical indicators such as the relative strength index, and market value-to-realized value ratio) are typical indicators of a base forming.

Bottom line: We believe Bitcoin’s recent drawdown reflects macro pressure and technical selling rather than an existential challenge to crypto. Institutions appear to be behaving prudently, and history suggests the ecosystem often emerges healthier after leverage is fully cleared, even if that process takes time. For investors with a long-term horizon, disciplined accumulation may be more effective than trying to call the exact low.

WHAT ARE THE RISKS?

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