Code red: What's behind Bitcoin’s sharp selloff?

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What's behind Bitcoin’s selloff

Higher interest rates weigh on risk assets

After months of expectations for monetary easing, investors received the opposite signal. New Federal Reserve Chair Kevin Warsh maintained a hawkish stance, with markets pricing in a longer period of elevated interest rates.

Federal Reserve interest rate changes by month. Source: Trading Economics.

For cryptocurrencies, this is a key factor. In a "higher-for-longer" environment, investors tend to favor predictable yield instruments such as government bonds and money market products, reducing appetite for volatile assets.A stronger U.S. dollar added further pressure. Historically, a stronger dollar makes risk assets less attractive to global investors, often weighing on crypto markets.

While Fed policy is rarely the sole driver of sharp Bitcoin declines, it has created a backdrop in which negative sentiment has had a stronger impact.

Multiple indicators confirm weakening demand

One of the key signals is the Coinbase Premium Index, which measures the price gap between Bitcoin on Coinbase and offshore exchanges. A negative reading typically indicates weaker demand from U.S. buyers compared to global markets.

Coinbase Premium Index trend. Data: CoinGlass.

The index has stayed below zero for about eight weeks, its longest stretch in more than a year. This suggests not so much aggressive selling as a lack of new buying interest.

Spot ETFs show a similar pattern. Over the past two months, investors have withdrawn nearly $7 billion from Bitcoin investment products.

The largest outflows came from BlackRock's IBIT fund, which accounts for a significant share of total withdrawals.

Rather than being the sole driver of the decline, ETFs are viewed as a sentiment indicator. Institutional investors that previously accumulated Bitcoin are now largely sitting on the sidelines.

Capital inflows and outflows in the U.S. spot Bitcoin ETF market by month. Source: SoSoValue.

A monthly Bitcoin candlestick also formed a Marubozu pattern, typically characterized by minimal wicks. This reflects sustained downward pressure throughout the month, with sellers maintaining control.

While not a predictive signal, the pattern highlights the intensity of the sell-off, which occurred with few meaningful rebounds.

Some analysts suggest capital may be rotating into other parts of equity markets, particularly artificial intelligence-related companies, according to Citigroup. However, this is seen more as a shift in allocation preferences rather than a full exit from digital assets.

Loss of confidence deepens the correction

Galaxy Digital CEO Mike Novogratz described the current downturn as a "crisis of confidence" in the crypto sector.

"The current sell-off is driven by a crisis of confidence. Capital is leaving the crypto space and interest is declining because energy is elsewhere," Novogratz said on the All Things Markets podcast.

He also pointed to changing sentiment around Strategy.

For years, Michael Saylor's company was viewed as a symbol of long-term Bitcoin accumulation. Its decision to begin selling part of its holdings shifted market perception more than the scale of the sales themselves.

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The change prompted investors to reassess the stability of large corporate Bitcoin holders. Novogratz also noted that Strategy's unrealized losses could attract additional speculative pressure.

Sentiment shifts have also spread beyond crypto markets. According to Reuters, Citigroup has cut its 12-month Bitcoin forecast from $112,000 to $82,000 and no longer expects net ETF inflows over the next year.

In a bearish scenario, Citi sees Bitcoin potentially falling to $53,000 if macro conditions worsen and ETF outflows continue.

Why this correction stands out

Previous Bitcoin downturns were typically driven by specific catalysts such as major bankruptcies or regulatory shocks. The current decline, however, is more diffuse.

A combination of macro pressure, weaker U.S. demand, declining ETF inflows, and shifting sentiment among major holders has collectively driven the sell-off.

As a result, Bitcoin's trajectory now depends not only on Federal Reserve policy or ETF flows, but also on whether investor confidence in the asset class can recover.

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