Crypto volatility is back, with lessons for investors
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Recent crypto market volatility, including the dramatic sell-off that occurred following announcements from the White House indicating renewed and enlarged trade tariffs between the U.S. and China has had significant implications for the crypto investing marketplace. Seasoned investors might be used to higher levels of volatility, but with the recent entrance of many TradFi players to space, a new batch of institutional and retail players alike are being exposed to how volatility can work to both the upside and downside. Debate and discourse have dominated headlines as to what specifically caused the recent dramatic sell-off in cryptoassets, but a few facts remain true.
Firstly, a trader using a smaller exchange (Hyperliquid) placed a large one-way bet on the market dropping substantially within minutes of the announcement coming from the White House that kicked off the market turmoil. While these remain allegations and suspicions at this time the facts remain that the size, timing, and one-way directionality of the position indicate higher-than-normal certainty for such a large unhedged position. Secondly, as larger institutions have developed and deployed crypto and other on-chain products and services, the risk tolerance of these newer investors may be lower than more veteran players, which might have compounded the sell-off. Lastly, is that large scale sell-offs do still trigger additional liquidations and margin calls, such as the issues that occurred at Binance during the sell-off, leading the firm to reimburse customers in excess of $400 million.
Taking all of that into account, let’s also take a look at a few lessons and takeaways that crypto investors should understand as the market works through this most recent bout of volatility.
Crypto Is Cyclical
An initial appeal of cryptoassets, especially for institutional investors and professional traders, was that the asset class often moved in a counter-cyclical manner that provided a hedge against volatility in other market sectors. More recently however this dynamic has changed as bitcoin and other assets have become more firmly entrenched in the risk-on asset category. Specifically as geo-political headlines around tariffs and other such issues have caused risk-on assets (many stocks), crypto has reacted in a similar manner.
While not surprising – as more traditional investors and institutions have allocated capital to crypto it makes sense that trading patterns will begin to mirror the wider marketplace – it does change the investment thesis that has long underpinned the crypto sector. As cryptoassets, including but not limited to bitcoin itself, trade more closely in alignment with other sectors, investors and advocates alike will need to adjust.
Crypto becoming a risk-on asset is not a negative, but it is a change that investors need to build into models.
Institutional Hedging Is Underway
Alongside the influx of institutional investment and interest that has piled into the crypto market since early 2024 there have been other developments. The rapid proliferation and growth of spot ETFs like those for bitcoin and ether – as well as the potential for dozens more once regulatory operations resume at full capacity – also ties into another important change. Hedging trades, investments, and market positions is a tried-and-true tool in the institutional toolbox, and unlike previous crypto bull markets the current one is dominated by those very same institutions. Retail investors, HODLers, or less experienced investors may not utilize these tools, but that is rapidly changing.
Following the flash crash put options for both bitcoin and ether – the two cryptocurrencies that still dominate the trading volume and dollar-value by a large degree – surged as investors sought to obtain protection against further downside. Algorithmic programs developed to monitor such activity took these moves as signs of further downside risk, further amplifying what already was a dramatic and widespread downturn. The very same hedging instruments that are used to protect against volatility and downside risk, in this case, led to increased liquidation of on-margin positions, which in turn pushed prices lower at an accelerated rate before stabilizing.
Institutions bring institutional trading tools, and the crypto market needs the maturity to process, digest, and analyze what these signals mean.
Policy Progress Does Not Guarantee Market Performance
An important, yet potentially painful lesson that crypto investors and advocates alike are beginning to learn is that – even with substantial policy progress and tailwinds permeating the marketplace, the success of crypto investments is not guaranteed. Even as TradFi institutions deploy products and services, states such as Wyoming launch state-backed tokens, and the U.S. federal government pivots to a pro-crypto position, market volatility and external forces can still wreak havoc on portfolios. Headlines are one thing, but market realities, leverage, algorithmic trades cascading upon one another, and risk appetite continue to dominate what happens in the day-to-day or the crypto sector.
Crypto is maturing, and with that maturity will come learning opportunities, some of which will be bumpier than others; investors and policymakers alike should view this positively.
