In early February, Bitcoin fell from around $68,000 to $60,000 in a single day. VanEck’s research team later flagged it as a -6.05 sigma event, which is a fancy way of saying it was one of the fastest single-day crashes in Bitcoin’s entire history.
And the weird part is, nothing actually happened specifically to cause this. There was no exchange collapse, no government crackdown, no scandal, nothing that would make you look at Bitcoin and think something fundamental had changed.
What changed was the amount of borrowed money sitting on top of it.
See, there’s this whole world of Bitcoin trading that most people never see. Beyond just buying and holding, there are traders who borrow money to make bigger bets on where the price is going. This is what people mean when they say “leverage.”
If you have $1,000 but you want to trade like you have $10,000, you can do that on certain platforms. The upside is that your wins get multiplied. The downside is that your losses do too, and if the price moves against you far enough, the platform will automatically close your position to protect itself. That’s called a liquidation. You don’t get a choice in the matter, your trade just gets shut down and you eat the loss.
Now imagine thousands of traders all doing this at once, all betting that Bitcoin would keep going up. Over the past several months, billions of dollars worth of these leveraged positions had quietly stacked up. And that works great until the price starts to dip.
When it does, some of those positions get automatically closed, which means Bitcoin gets sold, which pushes the price down further, which triggers more liquidations, which means more selling. It’s a loop that feeds on itself, and once it starts, it doesn’t really care about fundamentals anymore. It just runs until there’s nothing left to unwind.
I think this is worth understanding, because it reframes almost everything you’ve been reading about Bitcoin lately. The panic, the “crypto winter” headlines, the fear, nearly all of it traces back to this one mechanism. Not a flaw in Bitcoin itself, but a flaw in what people chose to build on top of it.
What Actually Happened in Early February
To give you a sense of how much borrowed money we’re talking about, let’s look at something called open interest.
Open interest is basically the total value of all the active leveraged bets in the market at any given time. All the futures contracts, all the margin positions, everything that hasn’t been closed yet. Think of it as a rough measure of how much speculation is sitting on top of Bitcoin at any moment.
In early October, when Bitcoin was near its all-time high around $126,000, open interest in Bitcoin futures peaked above $90 billion. That’s $90 billion worth of bets riding on where the price would go next. By the time we got to late January, it had come down a bit but was still sitting around $61 billion. Still an enormous amount of borrowed money in the system.
Then, in the first week of February, things started to unravel. Within just a few days, open interest dropped from $61 billion to around $49 billion — a 20% decline in a matter of sessions. That might sound abstract, but what it means in practice is that roughly $12 billion worth of leveraged positions were either closed voluntarily or, more likely, liquidated by the platforms themselves. VanEck estimated that somewhere between $3 to $4 billion in positions were forcibly liquidated across crypto markets that week, with about $2 to $2.5 billion of that concentrated in Bitcoin alone.
And as of this weekend, open interest has fallen to around $43.8 billion. That’s less than half of what it was at the October peak. More than $46 billion in speculative positions have been wiped out in about four months.
Now here’s something I think gets lost in all of this.
VanEck, who run one of the major Bitcoin ETFs, described what happened not as a panic or a collapse, but as an “orderly deleveraging.” Which is their way of saying the excess got flushed out of the system in a way that was violent, yes, but not chaotic. It was painful, but it was functional. More like a controlled burn than a wildfire.
Why This Keeps Happening
If this were the first time something like this had happened, you could maybe chalk it up to bad luck or unusual circumstances. But it’s not. This is the third or fourth time in Bitcoin’s history that the same basic pattern has played out. Price goes up, people get excited, leverage builds, the market gets fragile, and then some relatively minor event sets the whole thing off.
And that’s the part that surprises most people when they look at this crash closely. There was no single catastrophic trigger. No FTX moment. No Terra collapse. No China ban.
Matthew Sigel at VanEck broke it down into about five different contributing factors
The Kevin Warsh nomination for Fed Chair spooked markets a bit
The AI trade started unwinding which put pressure on Bitcoin miners who’d pivoted into that space
Tech stocks were selling off broadly
Silver had just crashed 30% in its worst day since 1980.
But none of those things, on their own, should have caused what happened on February 5th.
That day, Bitcoin dropped as much as 15%, briefly breaking below $61,000. CoinDesk called it the steepest one-day drawdown since the FTX collapse in November 2022. VanEck flagged it as a -6.05 sigma event, meaning, statistically, the speed of the move was so extreme it ranks among the fastest crashes in Bitcoin’s entire history. By the end of that week, Bitcoin was down roughly 30%.
But here’s the question that probably comes up when you hear this: Bitcoin has a market cap of over $1.3 trillion. How does leverage crash a $1.3 trillion asset by that much, that fast? The numbers don’t seem to add up on the surface, so it’s worth understanding how this actually works.
The key is that market cap isn’t the same as the amount of money it would take to move the price. Market cap is just the current price multiplied by the total number of coins in existence. It’s a snapshot, not a pool of money.
In reality, only a small fraction of all Bitcoin is actively being traded on any given day. Most of it is sitting in cold storage, in long-term wallets, in ETFs where people aren’t touching it. BlackRock’s Bitcoin ETF alone holds close to $100 billion worth, and during the entire crash, only about 0.2% of it was redeemed. Those coins weren’t for sale. Most of the supply wasn’t for sale.
So the price isn’t being set by the full $1.3 trillion. It’s being set at the margins, by the relatively thin layer of Bitcoin that’s actually changing hands at any given moment.
Think of it like a housing market. Your neighbourhood might have $500 million worth of homes in it, but if three people panic-sell on the same street in the same week, the compensations drop for everyone. The “market cap” of the neighbourhood falls, even though 99% of homeowners didn’t do anything.
Now drop a few billion dollars of forced selling into that thin layer of active trading, and you start to see why the impact is so outsized. When a leveraged position gets liquidated, the platform doesn’t wait for a good price. It sells immediately, at whatever the market will give it. That sale pushes the price down. And because these platforms all operate on similar margin thresholds, one round of liquidations tends to trigger another round at a slightly lower price. Each wave eats into the next batch of leveraged positions. The order books, which is basically the queue of buyers waiting at various price levels, get chewed through layer by layer.
It gets worse because of something called perpetual futures, which are the most popular way people trade Bitcoin with leverage. Unlike traditional futures that expire on a set date, perpetual futures just roll on indefinitely. They’re kept in line with the actual Bitcoin price through something called funding rates. Basically, periodic payments between traders that keep the contract price and the real price from drifting apart. When the market is overwhelmingly long, meaning most leveraged traders are betting the price goes up, and the price starts to fall instead, the cost of holding those positions spikes at the same time the positions are losing money. Traders get squeezed from both sides. That accelerates the exit, which accelerates the selling, which accelerates the price drop.
This is why BlackRock’s Robert Mitchnick, the head of digital assets at the world’s largest asset manager, came out last week and specifically called out perpetual futures platforms as the primary source of Bitcoin’s volatility.
Not the ETFs, not retail investors, not some fundamental problem with Bitcoin. He pointed to these leveraged trading venues and said Bitcoin’s trading behaviour is starting to resemble a “levered NASDAQ” and that this kind of thing makes it much harder for institutional investors like pension funds and endowments to take it seriously. When a minor tariff headline can set off a chain reaction that drops the price 20%, that’s not a fundamental problem. It’s a leverage problem.
So to come back to the original question, how does leverage crash a $1.3 trillion asset by 15% in a single day? Because the crash doesn’t need to move the whole $1.3 trillion. It just needs to overwhelm the thin slice of the market that’s actively trading. And when billions in forced selling hit that thin slice all at once, the price moves a lot further and a lot faster than the numbers on paper would suggest.
The uncomfortable truth is that this will happen again. Every cycle, the leverage builds back up, the pyramid gets restacked, and eventually something, it almost doesn’t matter what, knocks it over.
Why the Flush Is Actually Good News
So after all of that, you might be wondering, is there anything good to take away from this? I think there is, and I think it’s actually the most important part of the whole story.
Remember that open interest number I mentioned earlier? The total value of all the leveraged bets sitting in the system? At Bitcoin’s peak in October, that number was above $90 billion. As of this weekend, it’s sitting around $43.8 billion. That’s more than a 50% decline. Over $46 billion worth of speculative positions have been either closed or wiped out over the last four months.
That sounds dramatic, and it was. But here’s the thing about leverage getting flushed, it’s painful in the moment, but what it leaves behind is a much healthier market. All that borrowed money, all those fragile positions that were one bad headline away from liquidation, most of that is gone now. The people still holding Bitcoin after a 50% drawdown from the highs are, by and large, people who actually want to own it. Not traders chasing quick profits with borrowed money. Not speculators running 20x long positions hoping to catch a bounce. The supply has rotated, as analysts like to say, from weak hands to strong hands.
And there’s a data point that I think really brings this home. During the worst of the crash, BlackRock reported that only 0.2% of their Bitcoin ETF was redeemed. Their fund holds close to $100 billion in Bitcoin, and basically nobody left. The institutional money, the patient, long-term capital that everyone in this space has been waiting for, it held. That’s a very different picture from what the “crypto winter” headlines would have you believe.
VanEck’s Matthew Sigel made a similar observation on CNBC. He pointed out that while Bitcoin has pulled back about 50% from its peak, the realized volatility around this correction has also dropped roughly 50% compared to the 2022 bear market. In other words, the drawdown is significant, but the way it’s happening is structurally calmer and more orderly than what we’ve seen in past cycles. The market is maturing, even when the price action doesn’t feel like it.
None of this means the price can’t go lower from here. It might. But the speculative excess that made the market so fragile in the first place has been largely cleared out. The foundation underneath is more stable than it was a few months ago, even if the price is a lot lower. Sometimes those two things have to happen at the same time.
What This Means for You
If you’re someone who doesn’t trade futures, doesn’t use leverage, and just buys Bitcoin and holds it, whether that’s through an ETF, an exchange, or in self-custody, then almost everything I’ve described in this newsletter was happening around you, not to you.
Your Bitcoin didn’t get liquidated. Your position wasn’t force-sold into a falling market at 3am because you were on the wrong side of a 20x bet. You just watched the price go down, probably felt a knot in your stomach, and wondered whether something had fundamentally changed. It hadn’t. What changed was the speculative layer on top of the asset you own and that layer had nothing to do with your strategy.
I think this is one of the most underappreciated arguments for keeping things simple. There’s always going to be a temptation to try and maximise returns by using leverage or trading derivatives, especially when prices are moving fast and it feels like everyone else is making easy money. But what leverage really does is take an asset with strong long-term fundamentals and turn it into something that can blow up your portfolio on a random Wednesday because of a tariff headline or a funding rate spike that you’ve never even heard of. It turns a good investment into a fragile one.
The people who got hurt in early February were overwhelmingly leveraged traders. The people who are fine are the ones who don’t need to recover from anything, who are just sitting with a lower number on their screen but still own exactly the same amount of Bitcoin they owned before are the ones who kept it simple. They bought what they could afford, they held it somewhere safe, and they didn’t let borrowed money turn a long-term thesis into a short-term gamble.
I’m not saying this to be preachy about it. I’m saying it because in a few months, or maybe a year, or whenever the next cycle of excitement comes around, the leverage will start building again. It always does. Open interest will climb, funding rates will get stretched, and the market will get fragile all over again. And when that happens, the people who come out the other side in good shape will be the ones who didn’t need the market to behave perfectly in order for their strategy to work.
The Takeaway
If there’s one thing I’d want you to walk away with from this newsletter, it’s the distinction between Bitcoin and the market that trades around it. They’re not the same thing, and I think a lot of the confusion and fear people feel during moments like this comes from conflating the two.
Bitcoin, the network, the protocol, the fixed supply of 21 million coins, the proof of work, the decentralisation, none of that changed in February. It didn’t change when the price was $126,000 and it didn’t change when it touched $60,000. The asset is the same. What changed was the behaviour of the people trading it, and specifically, the amount of borrowed money those people were using to do it.
Once you really internalise that distinction, these crashes start to look different. Not pleasant, nobody enjoys watching their portfolio drop, but different. You stop asking “what’s wrong with Bitcoin?” and start asking “how much leverage was in the system?” And that second question has a much more useful answer, because leverage gets flushed, markets stabilise, and the asset is still there on the other side, doing exactly what it’s always done.
BlackRock knows this. VanEck knows this. The institutions that are quietly building the infrastructure around Bitcoin aren’t panicking. They’re pointing at the leverage and saying “that’s the problem, not the asset.” And I think if you can see it the same way they do, you’ll be in a much better position, not just for this cycle, but for every one that comes after it.