The price of Bitcoin has experienced a sharp decline, falling below 84,000 dollars and reaching a low of 82,131 dollars, levels not seen since November 2024. This sell-off coincides with the announcement of the latest package of trade tariffs by former president Donald Trump, who imposed a 25% tariff on the European Union, in addition to previous measures on Canada, Mexico, and China.

Not only Bitcoin: the market crash and the bear sentiment

Not only has Bitcoin experienced a significant decline, but the stock markets have also reacted negatively. The S&P 500 lost about 500 billion dollars in market capitalization due to concerns over a potential global trade war.

According to the trader IncomeSharks, the market is going through a bear phase, with BTC sold in response to the growing sentiment of economic uncertainty. The correction comes after the November 2024 rally, fueled by the US electoral race, which had pushed Bitcoin to new all-time highs.

The drop in BTC price was exacerbated by spot ETF outflows, with significant sales from major issuers like Fidelity, Ark, and Grayscale. Even BlackRock, which transferred millions of dollars in BTC and ETH to an exchange on Tuesday, sold 150 million dollars in Bitcoin, contributing to the increase in selling pressure.

Leveraged ETFs, in particular, are suffering from the sharp market decline. The T-REX 2X Long MSTR Daily Target ETF (MSTU), designed to offer a long and leveraged exposure on Strategy (formerly MicroStrategy), has experienced a drop of 81% from the November peak, while in the last three sessions it has lost 40% of its value.

Leveraged ETFs and the Risk of Underperformance

According to The Kobeissi Letter, leveraged ETFs experience significant declines in volatile markets due to daily rebalancing, necessary to maintain the leverage target. 

This effect amplifies losses and reduces returns compared to strategies less exposed to volatility. A study by GSR Markets found that, in conditions of high volatility, leveraged ETFs tend to underperform by 20% compared to traditional strategies.

In September, the asset managers REX Shares and Tuttle Capital Management launched two new leveraged ETFs with exposure to MSTR stocks, seeking to ride the growing correlation between the price of Bitcoin and the company’s shares. However, the recent correction has put their financial stability at risk.

MicroStrategy and the exposure to Bitcoin

Born as a business intelligence company, Strategy (formerly MicroStrategy) transformed into a cryptocurrency hedge fund in 2020, when its founder Michael Saylor began allocating the company’s capital to purchasing Bitcoin. To date, the company has spent over 33 billion dollars to accumulate BTC, with an average cost of about 66,000 dollars per coin.

Despite the recent downturns, MSTR saw an increase of 2,500% in returns at the peak of the bull market in November. However, as of February 26, MSTR shares have lost 15% year-to-date, following the bear trend of Bitcoin price.

The current decline of Bitcoin fits into a context of strong macroeconomic uncertainty, where trade tensions between the United States and its international partners could have long-term repercussions. 

The reaction of the spot ETFs and the behavior of financial institutions will be crucial to understanding the future prospects of the market-leading cryptocurrency.

In the short term, the price of BTC could continue to be influenced by global sentiment and upcoming developments in economic and trade policies.