Investors in digital assets are accustomed to extreme volatility, but a $1 trillion wipeout over the past six weeks has tested even crypto’s diehard believers and alienated many of its newest converts.

Bitcoin, the industry bellwether, has fallen dramatically since early October, when it hit a record high of $126,000. The world’s most popular cryptocurrency dipped below $81,000 on Friday before recovering slightly over the weekend. On Monday, as the broader stock market rallied, bitcoin topped $88,000, rising nearly 2% over a 24-hour period. (Crypto markets are open 24 hours a day, seven days a week.)

It is shaping up to be one of crypto’s worst months on record, and it’s not clear the market has bottomed out.

While crypto’s fate has broadly mirrored the stock markets in recent years, its current angst runs deeper. That’s largely thanks to an influx of mainstream money that behaves very differently from the funds controlled by a typical crypto investor.

Bitcoin is in a bear market, having dropped 30% from its most recent high, while the S&P 500 is down just 3% from its most recent peak. It is on track for its worst month since the 2022 crypto “winter” that culminated in the collapse of Sam Bankman-Fried’s FTX.

Anxiety is coursing through stocks and crypto for two key reasons: Investors are fretting over the Federal Reserve’s next rate cut, and they’re worrying about whether AI is a bubble that’ll blow up in their faces.

All of that weighs on crypto traders because digital assets, like tech stocks, are especially sensitive to changes in the Fed’s benchmark rate, which affects the cost of borrowing money and can quickly sap investor appetite for risk.

But crypto investors have an additional hangover to deal with following an October 10 flash crash. When President Donald Trump reignited his trade war with China that day, it prompted a wave of panic-selling that triggered automatic liquidations across the highly leveraged crypto market. In a single day, the flash crashed wiped out $19 billion worth of crypto. For a lot of folks, the stomach-churning crash was all the motivation they needed to exit crypto completely, and that’s left bitcoin and other tokens more susceptible to volatility.

The flash crash forced many investors sell their holdings to meet margin calls. That tends to have a snowball effect: The more bitcoin falls, the more calls investors face from their brokerages, the more they have to sell their bitcoin (and other holdings) to cover their positions.

What makes this crypto crash different is the presence of billions of dollars that have entered the crypto market through spot bitcoin funds that US regulators approved last year.

Mainstream investors got into crypto to enjoy the ride up, but they don’t have the same level of devotion to the ideology as early adopters who are bolstered by intense online communities encouraging one another to buy the dip and keep the faith.

“The bottom line is, bitcoin is for normies now,” Steve Sosnick, chief strategist at Interactive Brokers, told me. “As a result, the normies are going to view it as another speculative holding in their portfolio … it’s going to be treated like a volatile mainstream investment.” (CNN)

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