Concerns over the interest rate

On December 10, the Federal Reserve announced a rate cut of 25 basis points to reverse the slowdown in employment. The Fed’s decision was based on the September jobs report, which showed that the unemployment rate had increased to 4.4%, its highest since October 2021. While the rate cut would, in theory, finance borrowings and encourage spending, especially Bitcoin purchases, the Fed also signalled a pause on further rate cuts from January. Adding to this speculation was Fed Chair Jerome Powell’s observation that job growth may have been overstated for months. Over the following week, central banks worldwide are poised to announce their rate decisions, which would likely add to crypto volatility. Higher interest rates tend to discourage spending and lower consumer confidence, while encouraging saving behaviour. The higher the interest rate, the higher the opportunity cost of holding non-yielding, risky assets such as Bitcoin, unless they can deliver higher returns.

Market jitters after 10/10 Bitcoin crash

The Bitcoin crash of October 10, triggered by Trump’s threat to introduce additional tariffs of 100 per cent on China on top of existing levies, triggered a mass sell-off by institutional investors. As a result, $19 bn in leveraged trades was liquidated, and over $500 bn of value was erased within hours. Long-term holders of the currency have also opted to cash out, dumping 800,000 Bitcoin over the following month.

Rise in overall bearish sentiment in the economy

The recent fall in tech stocks, which account for nearly 50% of the market, as well as the looming fears of an AI bubble, has triggered a wave of risk aversion and caused investors to press pause as they evaluate the merits.

Failure to establish itself as a credible substitute for traditional assets like gold

For years, bitcoin has been mooted as “digital gold”, referencing the investor tendency to lean on gold to protect their portfolios during periods of market stress. However, bitcoin has thus far failed to break out of its status as a risk asset, and has maintained a positive correlation with equity, unlike gold whose trajectory is uncorrelated to risk assets like stocks. The narrative that Bitcoin will prove to be insurance against fiat currency and be embraced by central banks has thus far not taken off. So far, the IMF and major central banks have relegated crypto to the status of a risk asset and have capped their exposure to crypto under global rules. Last December, the IMF advised El Salvador – which recognised cryptocurrency as legal tender in 2021 – to veer away from using bitcoin as legal tender in exchange for a financing package.

Understanding Bitcoin’s downward slide, after achieving record high in October

The cyrptocurrency's continued slide has raised fears of an impending ‘crypto winter’, which is marked by a decline in trading volume and reduced investor sentiment. Here is what to know

Bitcoin and other cryptocurrencies like Ethereum aim to eliminate established intermediaries such as banks to enable instant transactions and reduce costs. (Freepik)

Continuing a slump which began two months ago, Bitcoin sank well below $85,000 on Monday (December 15), according to Coinbase data. Long regarded as the bellwether of the cryptocurrency market, Bitcoin has plummeted from its all-time high of $126,000 in early October, with the resulting crash wiping $1 trillion from the crypto market.

The slide has raised fears of an impending ‘crypto winter’, which is marked by a decline in trading volume and reduced investor sentiment. Here is what to know.

First, the basics

CRYPTOCURRENCY: Cryptocurrencies are essentially digital tokens, a version of digital currency that allows people to make payments directly to each other online without any intermediaries.

Traditional currencies like the Indian rupee or the US dollar are called fiat currencies: they are typically issued by the central bank of the country and accepted as legal tender. In contrast, cryptocurrencies do not have any intrinsic or legislated value, and their value is determined by the market demand for and supply of such currency.

BITCOIN: Bitcoin is arguably the best-known cryptocurrency, launched in 2009 by the mysterious Satoshi Nakamoto. It was designed to mimic the features of a cash transaction electronically.

Crucially, the supply of Bitcoin increases at a predetermined rate, and has a ceiling of around 21 million Bitcoin. Each bitcoin can be divided into 100 million satoshis (1 satoshi = 0.00000001 bitcoins).

BLOCKCHAIN: Bitcoin and other cryptocurrencies like Ethereum aim to eliminate established intermediaries such as banks to enable instant transactions and reduce costs. To achieve this, they rely on blockchain technology.

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A blockchain itself is a digital database or ledger stored across a network of computers that is, in theory, transparent and tamper-proof. Its name is intentional, with each block representing a chunk of data, and connected to each other in a chronological chain using cryptography. While any manner of information can be stored on a blockchain, blockchains are popularly used to record and maintain transaction ledgers.

Also Read | India bucks US tariffs with November exports surge: What is behind the numbers, is it sustainable

In contrast, commercial banks maintain a record of the account balances and transactions of their customers.

What explains Bitcoin’s downward slide?

01
Concerns over the interest rate
On December 10, the Federal Reserve announced a rate cut of 25 basis points to reverse the slowdown in employment. The Fed’s decision was based on the September jobs report, which showed that the unemployment rate had increased to 4.4%, its highest since October 2021.

While the rate cut would, in theory, finance borrowings and encourage spending, especially Bitcoin purchases, the Fed also signalled a pause on further rate cuts from January. Adding to this speculation was Fed Chair Jerome Powell’s observation that job growth may have been overstated for months.

Over the following week, central banks worldwide are poised to announce their rate decisions, which would likely add to crypto volatility.

Higher interest rates tend to discourage spending and lower consumer confidence, while encouraging saving behaviour. The higher the interest rate, the higher the opportunity cost of holding non-yielding, risky assets such as Bitcoin, unless they can deliver higher returns.
02
Market jitters after 10/10 Bitcoin crash
The Bitcoin crash of October 10, triggered by Trump’s threat to introduce additional tariffs of 100 per cent on China on top of existing levies, triggered a mass sell-off by institutional investors. As a result, $19 bn in leveraged trades was liquidated, and over $500 bn of value was erased within hours.

Long-term holders of the currency have also opted to cash out, dumping 800,000 Bitcoin over the following month.
03
Rise in overall bearish sentiment in the economy
The recent fall in tech stocks, which account for nearly 50% of the market, as well as the looming fears of an AI bubble, has triggered a wave of risk aversion and caused investors to press pause as they evaluate the merits.
04
Failure to establish itself as a credible substitute for traditional assets like gold
For years, bitcoin has been mooted as “digital gold”, referencing the investor tendency to lean on gold to protect their portfolios during periods of market stress. However, bitcoin has thus far failed to break out of its status as a risk asset, and has maintained a positive correlation with equity, unlike gold whose trajectory is uncorrelated to risk assets like stocks.

The narrative that Bitcoin will prove to be insurance against fiat currency and be embraced by central banks has thus far not taken off. So far, the IMF and major central banks have relegated crypto to the status of a risk asset and have capped their exposure to crypto under global rules.

Last December, the IMF advised El Salvador – which recognised cryptocurrency as legal tender in 2021 – to veer away from using bitcoin as legal tender in exchange for a financing package.

Why fears of a ‘crypto winter’ may be exaggerated

Typically, Bitcoin’s valuation has followed a four-phase cycle spread over four years, culminating in an event called Bitcoin halving. During this period, the bitcoin rewards granted to their miners (the parties that keep the currency functional) are cut in half, thus reducing the bitcoin supply in the market. This is done to ensure that only 21 million bitcoins will continue to exist. The last halving event happened in April 2024.

Usually, bitcoin proceeds to rally in the months following a halving event to reset and reach a new high. It would then fall by 70% to 80% from this peak, triggering fears of a crypto winter, marked by low crypto prices. This would set the stage for the next halving event and the next cycle.

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Thus far, the currency has not shed its value this drastically. This may be credited to two factors that have unfolded since last April: On one hand, the US allowed the trade of Exchange Traded Funds (ETFs) with Bitcoin as the underlying asset. These ETFs track Bitcoin’s price movement without an investor needing to actually own the cryptocurrency itself. This has connected investors trading on traditional stock exchanges with Bitcoin. Bitcoin ETFs, which launched in January 2024, are the largest bitcoin holders with over 1.4 million coins as of July 2025, representing 6.8% of the 21 million cap.

On the other hand, Donald Trump’s return to the White House this January has installed a crypto-friendly administration. The US president signed an executive order for a bitcoin reserve in March, while the GENIUS Act, signed in June, introduced a regulatory framework for stablecoins, a form of cryptocurrency pegged to an asset.