Why Is Crypto Crashing Right Now

 Crypto.King
 
  Crypto.King
 
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Welcome to my crypto corner where I share my insights and experiences. Remember, it's your money on the line, so always do your own due diligence before diving in.
 

•  05 Feb 2026
 

The crypto market is in free fall, and for many traders, it feels eerily similar to the brutal unwind of 2022. BTC has plunged more than 25% in a single week, sliding under $63,000 and erasing the optimism that dominated much of 2025. What was supposed to be the golden era of institutional adoption, ETF inflows, and regulatory clarity has quickly turned into a liquidity-driven selloff that is exposing how fragile speculative markets can be when the dollar tightens.

The initial breakdown began over the weekend, when liquidity in crypto markets is typically thinner. As Bitcoin sliced through the $80,000 level and kept falling, order books failed to provide meaningful support. The move accelerated after price dropped below the so-called “realized price” the average acquisition cost of all circulating Bitcoin. That level, widely tracked by on-chain analysts, represents the breakeven zone for the average holder. Once breached, the psychological shift is severe: the average investor is suddenly sitting on unrealized losses, which often triggers panic-driven selling.

Low liquidity was not accidental. In late January and early February, the U.S. Treasury built up nearly $1 trillion in its Treasury General Account (TGA) at the Federal Reserve amid concerns about a potential government shutdown. When the Treasury increases its cash balance, it effectively drains liquidity from the banking system. That vacuum pushes funding costs higher and pressures risk assets. Bitcoin, arguably the most liquidity-sensitive asset in global markets, was hit first and hardest.

Forced liquidations amplified the move. Over $2.5 billion in leveraged crypto positions were wiped out during the weekend alone. ETH absorbed roughly $1.15 billion of those liquidations, signaling that speculative positioning had become extreme. One exchange, Hyperliquid, accounted for about 40% of total liquidations, including a single $222 million Ethereum position that was forcibly closed. This is classic reflexivity: price drops trigger liquidations, which create more selling pressure, which triggers more liquidations.

The painful lesson for many investors this week is that Bitcoin is not behaving like digital gold. During the same period, gold fell between 9% and 12%, while silver collapsed nearly 33% in a single session. Instead of acting as a hedge, BTC fell alongside precious metals. According to analysis circulating from major investment banks, margin calls played a central role. Institutional portfolios holding both crypto and metals were forced to sell their most liquid assets to raise cash. In a real liquidity crunch, Bitcoin acted less like a safe haven and more like a global ATM.

Monetary policy added another layer of pressure. The Federal Reserve held rates steady, which was expected, but signaled no urgency to cut. That alone was enough to dent risk appetite. The bigger shock came from Donald Trump’s nomination of Kevin Warsh as the next Fed Chair. Warsh is widely viewed as hawkish on balance sheet expansion and skeptical of prolonged artificial liquidity. For a market that thrived on the era of abundant central bank stimulus since 2008, this nomination is critical. Bitcoin long-term valuation has been deeply intertwined with global liquidity conditions. The idea that the “easy money” regime could be structurally over is a direct challenge to the speculative framework that fueled crypto rise.

Regulatory uncertainty also resurfaced. A White House meeting aimed at advancing the Clarity Act failed to reach compromise, particularly over stablecoin interest structures. The setback raises the possibility that meaningful crypto legislation could be delayed beyond 2026. For institutions waiting on regulatory certainty before deeper allocation, that delay is a headwind.

Meanwhile, the correlation between Bitcoin and the Nasdaq 100 has climbed to approximately 0.8, underscoring how tightly crypto is now linked to tech equities. Weak guidance from AMD pressured semiconductors, while massive 2026 capex plans roughly $200 billion from Amazon, $185 billion from Google, $120 billion from Microsoft, and over $115 billion from Meta have raised concerns about margin compression and capital intensity across the sector. As the Nasdaq rapidly pulled back from recent highs, crypto followed. ETF flows, which were a major tailwind in 2025, have reversed sharply, with more than $2 billion in net outflows from Bitcoin ETFs since the start of February alone.

Corporate crypto proxies are also under stress. Strategy, the largest public Bitcoin treasury company, reported a staggering $12.4 billion net loss in Q4 2025, or $42.93 per share, driven by Bitcoin’s drop below its average purchase price near $76,000. The company holds 713,502 BTC acquired for $54.2 billion, now reflecting an unrealized loss of roughly $9 billion. Its stock has fallen 71% over the past six months and 76% from its peak of $457. The premium to net asset value has collapsed, with the company trading at an mNAV of just 1.1. Although it maintains $2.25 billion in cash reserves enough to cover obligations for roughly 30 months prediction markets now assign over a 30% probability that it may be forced to sell some Bitcoin within the next year if prices continue to slide.

Other major cryptocurrencies have mirrored the collapse. ETH is down 35% for the week to around $1,820. BNB has dropped 30% to roughly $606. XRP has fallen 32% to $1.21. SOL is down 33% to $78, while DOGE has declined about 25%. The speed and magnitude of these moves confirm that this is not an isolated correction but a systemic deleveraging event across digital assets.

For traders and investors, the key question is whether this is capitulation or the early phase of a deeper liquidity unwind. Historically, Bitcoin has experienced multiple drawdowns exceeding 50% before recovering to new highs. In 2022, it collapsed from around $70,000 to below $20,000 before eventually stabilizing. Veteran holders understand the volatility profile. But this cycle feels different because it is not driven by an internal crypto scandal or exchange failure. It is macro-driven, liquidity-driven, and policy-driven.

If liquidity conditions stabilize, ETF outflows slow, and forced liquidations clear out excessive leverage, a base could form. However, if the TGA continues to drain reserves, the Fed maintains a restrictive stance, and Warsh signals a structural tightening bias, risk assets especially crypto may remain under pressure.

For now, the message from the market is clear - crypto is a high-beta liquidity trade. When dollars are abundant, it thrives. When liquidity contracts, it cracks. Traders should watch funding rates, ETF flows, Nasdaq correlation, and Fed balance sheet dynamics closely. In this environment, macro matters more than memes.

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