What Started The Crypto Winter And How Much Further Will Bitcoin Drop?

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Crypto Winter Theories

The Wall Street Journal reports A New Crypto Winter Is Here and Even the Biggest Bulls Aren’t Certain Why

Bitcoin just suffered its largest weekly decline in more than three years. But the worst part for some of crypto’s permabulls is that they aren’t sure what exactly caused the crash.

“There was no smoking gun,” said Michael Novogratz, who runs Galaxy Digital, a crypto merchant-banking and trading firm.

For much of last year, crypto was in ascendance. President Trump’s return to the White House ushered in a new era for digital assets, which continued to gain acceptance among individual investors and legitimacy on Wall Street. As bitcoin and other popular tokens touched record highs, it seemed as though the market’s best days always lay ahead.

This time, there is no clear consensus. “If you ask five experts, you’ll get five explanations,” said Anthony Scaramucci, who served for 11 days as communications director during Trump’s first term and is among the best-known crypto bulls at his firm, SkyBridge Capital.

Five WSJ Reasons

1) New shiny objects
There is no shortage of other markets for traders to make audacious bets, said Pompliano, the CEO of ProCap Financial. Prediction markets, gold, silver, artificial intelligence and so-called meme stocks are all vying for their attention of late, drawing eyes away from crypto.

“It used to be that bitcoin was the consensus view where asymmetry existed,” Pompliano said. “Now you have AI, prediction markets…many other areas where people can go and they can speculate.”

2) More supply
Wall Street has sought to capitalize on crypto’s popularity by launching a growing array of exchange-traded funds and derivatives linked to bitcoin and other popular tokens. Their proliferation might not affect the sheer number of bitcoins, ethers and other tokens, but some investors thought their arrival has dented bitcoin’s appeal as a scarce asset.

Bitcoin’s main appeal has always been its limited supply of 21 million coins. By launching ETFs and complex derivatives, Wall Street has enabled investors to bet on the price of bitcoin without needing to buy or hold the actual coins, some analysts said.

3) New sheriff
Other investors suspected that Kevin Warsh, Trump’s pick to be the next chair of the Federal Reserve, might be bringing down crypto prices.

Warsh, they said, is seen as more hawkish on interest rates as a tool to tame inflation, and more supportive of a stronger U.S. dollar. Higher rates and a stronger dollar are conditions that typically hurt some alternative assets, such as gold and crypto, making them less attractive to investors. And this past week, the WSJ Dollar Index edged up 0.4%.

Still, Warsh and the Fed are expected to cut rates this year, not raise them. And Warsh has warmed to bitcoin. He famously dubbed the digital currency a “policeman for policy,” saying in a TV interview that bitcoin’s price can inform policymakers when they are doing things right and wrong. 

4) Clouded clarity
After Trump signed into law the Genius Act last year, paving the path for stablecoins—digital assets pegged to fiat currencies like the dollar—the industry turned its attention to the next important piece of legislation: the Clarity Act. This bill would create a clear regulatory framework for the burgeoning industry.

Congress appeared on the cusp of moving the bill ahead when a dispute between crypto exchanges and traditional banks stalled that momentum. Without this measure, many financial firms are hesitant to integrate digital assets into their offerings. And unless a compromise is reached, the dust-up might deny the crypto market a catalyst that could have extended the rally.

5) Profit-taking
Novogratz and some other investors thought much of the selloff was driven by investors eager to lock in gains they collected when bitcoin, ether and other digital tokens rallied in the midst of the “euphoria” of Trump’s election in 2024 and pledge to make the U.S. the world’s crypto capital.

And those gains were indeed spectacular. Bitcoin, for one, rocketed around 80% from Election Day until early October of last year.

Sharp selloffs are hardly unusual in crypto, of course. They are so regular, in fact, that investors give them a name—crypto winter—that befits the belief that these downturns are as predictable as the seasons.

Some analysts believe this crypto winter could thaw faster than those of the past. No key companies have collapsed or faced allegations, revelations that have elicited crises of confidence in past crashes.

Dismiss All But One

Yes, there is profit taking, but profit taking does not start bear markets.

The more supply theory is valid. Leverage blew up and unwound.

The Journal missed Bitcoin whales selling. Definitely that’s a factor.

The Journal missed the key idea on the Fed Warsh theory. The threat of Warsh is not higher interest rates or fewer cuts, but the Warsh’s desire to reverse QE.

Federal Regime Change

John Mauldin discusses Warsh in Federal Regime Change

Balance Sheet Bloat

In 2008, Kevin Warsh was a Fed governor during the Great Financial Crisis. He initially approved of quantitative easing as an emergency policy. He left the board when QE went from emergency policy to normal policy. He’s since been highly critical of the Fed’s bloated balance sheet, arguing it is an economic distortion that should be reduced faster.

 Warsh said this in a November 2025 Wall Street Journal column:

 “The Fed’s bloated balance sheet, designed to support the biggest firms in a bygone crisis era, can be reduced significantly. That largesse can be redeployed in the form of lower interest rates to support households and small and medium-size businesses.”

Gavekal’s Will Denyer thinks other officials will agree with Warsh on this point.

“Arguably, current Fed policymakers have already cooled on the use of QE. They are all shaped by their experience of the last crisis. Their likely takeaway from the Covid-19 shock is that aggressive fiscal and monetary action can produce a V-shaped recovery, which is positive, but allowing that stimulus to persist long after the recovery begins can cause inflation to overshoot. As a result, the average Fed policymaker probably already shares some version of Warsh’s view that QE and other forms of stimulus are appropriate during emergencies, not afterward.”

We can debate whether or not Warsh will succeed. Mauldin notes “The problem here is that QE is proving almost impossible to unwind.”

What’s not debatable is balance sheet reduction is a liquidity drain, and neither Bitcoin nor the stock market likes liquidity drains.

So add Warsh to the mix, but not as presented by the WSJ and others.

Programmable Money Theory

It has been said that crypto is "programmable money." If so, $BTC should trade like software stocks. And this chart shows they do.

Is the era of AI Agents, which is killing SaaS, and smashing software stocks, is "programmable money" suffering under the same fate? pic.twitter.com/psuIgxkOyM

— Jim Bianco (@biancoresearch) February 5, 2026

Money Theory and Synthetic Supply of Bitcoin

So here’s the issue you get influencers like this guy have a quarter million followers and they claim they don’t know why it is declining… it’s because they don’t understand basic mechanics of price discovery.

They don’t understand that the marginal buyers or the float… https://t.co/6oP1WpN65c

— Bob Kendall (The Kendall Report) (@PortfolioXpert) February 4, 2026

So here’s the issue you get influencers like this guy have a quarter million followers and they claim they don’t know why it is declining… it’s because they don’t understand basic mechanics of price discovery. They don’t understand that the marginal buyers or the float determines price they think the onchain bitcoin is that is the price discovery.

Once you can synthetically manufacture the supply, the asset is no longer scarce and once scarcity is gone, price becomes a derivatives game, not a supply-and-demand market.

This is exactly what has happened to Bitcoin. This is the same structural break that occurred in gold, silver, oil, and eventually equities once they became derivatives-dominated. The original premise that no longer exists Bitcoin’s entire valuation logic was built on finite supply (21M) and inability to be rehypothecated.

That died the moment: •Cash-settled futures •Perpetual swaps •Options •ETFs •Prime broker lending •Wrapped BTC •Total return swaps were layered on top of the chain.

From that moment forward: Bitcoin supply became theoretically infinite. Not on-chain in price discovery.

The metric that explains the collapse Synthetic Float Ratio (SFR) Once you can synthetically manufacture the supply, the asset is no longer scarce — and once scarcity is gone, price becomes a derivatives game, not a supply-and-demand market.

Why Wall Street can now “trade against” Bitcoin They do exactly what they’ve done in every commodity market: 1.Create unlimited paper BTC 2.Short into rallies 3.Force liquidations 4.Cover lower 5.Repeat They are not “betting” — they are manufacturing inventory. The same 1 BTC can now support: •An ETF unit •A futures contract •A perpetual swap •An options delta •A broker loan •A structured note All at once. That is six claims on one coin. That is not a market. That is a fractional reserve price system.

Even if paper bitcoin was not involved, at some point whales were bound to sell. The energy to mine is not unlimited. Someone would want to cash out.

The ETFs, even unlevered, were the final straw. Expecting those who got in late to HODL is now a proven flawed idea.

Miners Unplugging Equipment

Bitcoin Is Crashing So Hard That Miners Are Unplugging Their Equipment
https://t.co/RndAq16dp4

— Live Monitor (@amlivemon) February 6, 2026

Greater Fool Theory

The market finally ran out of greater fools.

The Journal missed that one too.

And some people even believe they are playing the greater fools theory. Those who do will get out on technical breaks.

Technical Theory

I discussed the technical and fundamental aspects of the selloff in Bitcoin Plunge Steepens, Down 48 Percent from January 2025. Why?

Bitcoin Bounce Where?

The weekly support line was 75,000 and we smashed through that as expected.

The next support is a consolidation zone 50,000 to 55,000. Then it’s 40,000 followed by 25,000 and 15,000.

I discussed the E-Wave count in the above link. The daily count is debatable. But the weekly chart is clear.

Bitcoin has been in a wave 3 down. There rates to be a correction then further down.

The head-and-shoulder pattern offers a similar take. The implied target is 25,000.

Then there is Saylor’s MSTR leveraged fund. It’s blowing up. I also discuss Saylor in the above link.

I suspect he is a minor player in this, assuming his statements that he is not impacted into forced selling unless Bitcoin drops to 8,000 or so.

I don’t know if that is accurate but I do know the market likes to test arrogance and Saylor has more than an ample supply.

“If people knew what I know Bitcoin would go to $10 million tomorrow,” said Saylor.

Q: Hmm. If it’s that easy, why doesn’t Saylor just tell us what he knows so we will know too, and Bitcoin will go to 10 million?

A: Saylor is an arrogant charlatan who doesn’t know a damn thing.

He’s also a late convert, snake oil preacher who is underwater on Bitcoin despite buying at 11,000.

Saylor borrowed billions of dollars to buy Bitcoin. And as the price rose, he took on more and more debt to buy more.

Ten Key Points

1. The bitcoin “Store of Value” trade has fundamentally broken in two. Unlike gold, which is mined with energy, but then remains “gold” regardless of how much mining energy is expended, bitcoin requires continual energy expenditure to maintain the bitcoin network.
2. Maintaining a digital ledger requires a constant injection of ordered energy.
3. The miners are currently doing the same amount of work for 27% less revenue. They have billions in sunk capex, and as long as bitcoin remains above the marginal cash cost of mining (~$85K), they will keep mining. This, in itself, is nothing new. It has always been the case that mining has periods of unprofitability.
4. The difference this time is that bitcoin miners are no longer using “surplus” energy.
5. AI datacenters pay 3-4x the revenue per kilowatt as bitcoin mining — and the miners are switching.
6. Another “halving” in 2028 will reduce revenue per hash by 50% unless the bitcoin price increases by 100%. 
7. The “Passive Bid” Has Diminished. For two years, the ETF complex provided a mindless, price-agnostic bid for bitcoin. That tap has slowed radically, and now bitcoin must find a new untapped bid.
8. Absent endogenous cash flows (e.g. earnings, transaction fee share, dividends), bitcoin has no stabilizing feedback loop—only reflexive ones. Further declines do not summon value buyers; they merely test the resilience of belief.
9. Bitcoin requires a massive, continuous calorie burn (electricity) just to prevent the network from collapsing. As energy prices rise (thanks to AI and the exhaustion of the 2010s surplus), the cost to maintain your “digital gold” rises.
10. Gold is chemically inert. It sits in a vault. Its maintenance cost is effectively zero and largely unaffected by existing value.

In case you missed it, please see my January 11 post Did Bitcoin “Digital Gold” Just Become Fool’s Gold?

Bitcoin miners have better things to do than mine Bitcoin.

If miners go offline, the hash rate drops and demand for Bitcoin drops. See the article for 5 more points and further discussion.

Add to that whales are bailing. Who exactly are the buyers when whales sell?

Synopsis

1. Fundamental: Miners have better things to do than mine Bitcoin
2. Technical: The E-Wave pattern is ominous
3. Technical: A standard technical head and shoulders pattern is ominous
4. Fundamental: Warsh wants to roll back QE and that removes liquidity
5. Fundamental: Potential for more whale selling
6. Fundamental: Fear
7. Fundamental and Technical: Bianco’s Software thesis
8. Fundamental: Saylor – Will the market test Saylor? Is his stop out point higher than what he says?

Whale Selling and Fear

Bitcoin classic theory is hold forever. But what if you have already made a billion dollars, 100 million, or even 1 million dollars?

Points 2, 3, 5, and 6 all fit together.

If you bought early, do you really want to go through another crypto winter with average drawdowns over 80 percent?

Perhaps you do if you are up $10,000. But what if you are a whale up $10 million or $100 million?

What if you are up $1 million and Bitcoin is now over 50 percent of your account.

The higher Bitcoin goes the more people have to fear.

The ETFs and leveraged ETFs come into play. Selling begets selling, especially from the Johnny-come-latelies.

We can now put this together can’t we?

What Happened in Eight Points

1. Supply of greater fools ran out
2. Technical break
3. Selling begets selling
4. Miners have better things to do with their money
5. Warsh wants to remove liquidity
6. Whales have made so much money they finally start dumping
7. Bitcoin got so high that non-whales are fearful
8. Those following technicals want out too

That is the approximate order. But I can sum it up in two words.

Q: What Happened?
A: Psychology Changed.

That’s it.

This is quite similar to the housing bubble. People went from standing in lines out the door and around the corner for the right to enter a lottery to buy a Florida condo, to no interest at all.

That happened in less than a week.

How Low Will Bitcoin Go?

I don’t know and nobody else does either. The bottom callers are all charlatans.

But I do know the technical pattern is ominous. And I also know the fundamentals suck as well.

Perhaps you dispute the points I have made. But, if you are sitting on huge profits, do you really want to sit through another crypto bear market?

That’s what every bull and whale has to answer. But this time, it’s not just the true believers in play. It’s leveraged technical players going along for the ride.

It’s also whales, who even if they still believe, now wonder if enough is enough.

It’s bitcoin miners that have better things to do with there money.

It’s wondering where the next pool of greater fools will come from.

I don’t believe we have seen panic yet. Certainly the drawdown so far is not close to the average crypto winter yet.

If significant money is involved, to hold now is one big roll of the dice where not just one thing I said above has to be wrong, but nearly all of it.

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