Bitcoin plummeted, market confidence is severely shaken, will the "optimistic narrative" of cryptocurrency reverse?

The cryptocurrency market is experiencing a huge shock, shaking investor confidence.

On Monday, cryptocurrencies continued to be heavily sold off. Bitcoin fell below $50,000 during the day, plummeting by 16% at one point, while Ethereum saw a high daily decline of 23%, marking the largest drop since 2021.

Earlier this year, with the approval of two major cryptocurrency spot ETFs by the U.S. Securities and Exchange Commission (SEC) and U.S. presidential candidate Trump expressing support for cryptocurrencies, Bitcoin appeared to be decoupling from stock market fluctuations, leading investors to gradually become optimistic about the outlook for Bitcoin.

According to data compiled by Bloomberg, two weeks ago, the 30-day correlation between Bitcoin and the MSCI World Stock Index was -0.2, a rare shift to a negative value in four years, indicating that the Bitcoin market and global stock markets are beginning to move in a negative correlation.

However, this "optimistic narrative" was brutally shattered by yesterday's plunge. As recession concerns intensified and global stock markets saw increased selling pressure, the correlation between Bitcoin and global stock markets strengthened once again, fueled by geopolitical tensions adding to investors' anxiety.

In just one day yesterday, Bitcoin almost gave back half of its gains in the past year, dropping by 20% from its previous all-time high.

Rich Rosenblum, Co-CEO and Co-Founder of digital asset investment company GSR, commented:

"For every 1% drop in the market, investor confidence takes a hit. For cryptocurrencies, as Bitcoin is a Veblen commodity (a commodity whose demand is directly proportional to its price), the resilience of confidence in it even exceeds that of any other market in the world."

Weak employment data has further dampened the cryptocurrency market.

Last week's non-farm payroll data fell short of expectations, with the unemployment rate soaring to a nearly three-year high, triggering the recession indicator "Sam's Rule." Risk assets, including cryptocurrencies, suffered heavy losses, with Bitcoin spot ETFs experiencing the largest outflow of funds in nearly three months.

Virginie O'Shea, Founder and CEO of Firebrand Research, stated that holding Bitcoin as a strategic reserve is a "crazy idea":

"If you want asset reserves, you need to look for relatively stable things in unstable markets, and cryptocurrencies are the opposite."

Will the downward trend continue?

Some believe that Bitcoin may further decline in the future.

Dessislava Aubert, Senior Analyst at data platform Kaiko, said:

"We may see further declines as market makers may reduce risk exposure to avoid toxic fund flows. We have observed similar declines in the top ten alternative coins."

Aubert noted that since early August, Bitcoin's 1% market depth (the 24-hour average trading volume within a 1% price change range) on major cryptocurrency exchanges such as Binance, Bybit, Bitfinex, and Coinbase has dropped by over 40%, **indicating that selling pressure is weakening market liquidity **

However, some industry insiders are still optimistic about the cryptocurrency market.

Zaheer Ebtikar, the founder of the cryptocurrency fund Split Capital, believes:

"This is a transition, similar to TradFi (traditional finance), (Bitcoin's positioning) is transitioning from short-term derivatives to long-term holding."