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A disconnection between prices and fundamentals
Bitcoin prices have now returned to levels last seen in June 2025, following what we view as a puzzling correction. From the recent peak, prices have fallen 16%, while similar risk assets, such as the Nasdaq index, are down only 2%. We believe the correction, and the subsequent liquidity cascades seen a week ago, are still reverberating through the industry, prompting some crypto-natives to further liquidate.
In our view, there is a substantive and growing disconnect between prices and fundamentals. The backdrop for Bitcoin in particular remains remarkably constructive. Economic weakness continues to show through the narrow lens of Fed surveys, specifically the Philadelphia and New York Fed surveys, both of which significantly missed expectations to the downside, pointing to much weaker business sentiment. Broader economic data remain obscured by the ongoing US government shutdown, which has delayed numerous data releases.
Polymarket data highlight rising scepticism over the shutdown being resolved anytime soon, with the probability of it lasting over 30 days now at 82%. This would potentially break the record for the longest shutdown and underscores the degree of government dysfunction. Meanwhile, regional bank stocks in the US have sold off over the past few days, echoing the turmoil seen during the regional bank collapses of March 2023. Together, these developments have heightened concerns about the economy, with futures markets now aligning with our expectations for two additional interest rate cuts this year, one on 29 October and another in December.
Solid inflows into ETPs
Fund flows have been remarkably resilient, with week-to-date inflows of US$40M. However, this figure masks US$588M in outflows from Bitcoin ETPs, relatively modest compared to prior corrections of similar magnitude (for example, the late-February price decline, where we saw US$2.9B in outflows). This suggests that selling pressure is likely coming from crypto-native investors rather than ETP holders.
Regarding the trigger of the correction, namely the US/China trade tariff announcements, poses a greater long-term risk to equities than to digital assets, given the potential for earnings compression among traditional corporates. Bitcoin, by contrast, remains relatively insulated. Moreover, the renewed stress in US regional banks could once again provide support for Bitcoin, as investors look to diversify away from the traditional financial system, just as they did in March 2023.
Overall, sentiment remains bearish across digital assets, though we believe this stems largely from extraneous factors. The fundamental support for Bitcoin and the broader asset class, such as the government shutdown, weakness in regional banks, and the prospect of looser monetary policy, remain firmly intact.
