Bitcoin Bear Markets Are Milder, Suggesting Softer Future Bull Runs

A Shift in Historical Patterns

The latest bear market saw Bitcoin retreat by approximately 55%. While significant for most asset classes, this decline was relatively moderate compared to the coin’s history. Previous cycles were far more dramatic. For instance, after hitting nearly $69,000 in November 2021, the value dropped below $16,000 within a year. That crash exceeded 75%. It was fueled by rising interest rates, crypto sector bankruptcies, and the collapse of the FTX platform. Even older cycles generated retractions of over 80%, illustrating the extreme volatility that defined this financial asset for years.

These sharp swings were not limited to losses; recoveries were equally spectacular. From under $4,000 in the early 2020s, the price exploded to nearly $69,000 in 2021. Later, starting from the 2022 low, the rate rose above $100,000. This move was facilitated by US spot Bitcoin ETFs, which opened access to a broader investor base. However, both sides of the equation—buyer euphoria and seller panic—appear to be losing intensity, including in the upward direction. Ryan Rasmussen, Director and Head of Research at Bitwise, identifies the January 2024 launch of spot ETFs as a key factor in this normalization. Before these instruments, Bitcoin ownership was concentrated among retail investors, native crypto funds, and tactical traders. Rasmussen emphasizes that ETFs provided financial advisors and other professionals with a familiar, accessible method to integrate Bitcoin into traditional portfolios.

The Role of Institutional Investors

Professional investors approach cryptocurrencies fundamentally differently than retail participants. According to Rasmussen, an institutional investor might allocate around 2% of their portfolio to Bitcoin. In contrast, individual investors focused on crypto may have between 20% and 30%, or even more, of their capital tied to this asset. Consequently, the impact of a crisis is perceived differently depending on ownership structure. „If the price drops 50%, my portfolio drops only 1%,” Rasmussen explained in an interview, illustrating the perspective of an investor with a 2% allocation. Another critical mechanism is portfolio rebalancing. An advisor targeting a 2% weight for Bitcoin will buy the asset after a sharp drop to return to the target weight. Symmetrically, if Bitcoin surges and reaches 5% of the portfolio, that same investor will sell part of the position at the next rebalance.

Rebalancing Mechanisms Dampen Volatility

This behavior can dampen the effects of massive selling but simultaneously limits the magnitude of large rallies.

Future Expectations and Market Size

Mark Connors, Chief Investment Officer at Risk Dimensions, anticipates that increasing institutional participation will contribute to smaller drawdowns than the 70-80% observed in past cycles. However, he warns that investors should not expect benefits without costs. Bitcoin’s volatility has decreased over time, but returns have also moderated. More institutional investors could lead to „smaller final peaks due to rebalancing,” Connors noted, suggesting that the same Wall Street mechanisms that can prevent panic during declines can create selling pressure when prices hit highs. Jim Ferraioli, Head of Digital Asset Research at Schwab, offers an alternative perspective, considering the explanation for Bitcoin’s reduced movements to be simpler. He is not convinced that ETFs and institutions are the sole drivers of change. Although Wall Street’s presence has grown, Bitcoin remains largely a retail-type asset, Ferraioli argues.

ETF ownership should not automatically be treated as institutional ownership, as individuals can also buy these funds.

Instead, Ferraioli points to the enormous size of the market. Bitcoin’s market capitalization has returned to around $2 trillion. This means much larger sums of money are required to double the asset’s value, compared to the era when it was worth only a few billion dollars. Spectacular multipliers from the early years become harder to replicate as the calculation base grows exponentially. Ferraioli also observes signs that native crypto industry investors, not necessarily ETF buyers, were those who supported the market during the recent recession.