Bitcoin Plunge: Deutsche Bank Reveals 5 Key Causes

According to Deutsche Bank analysis, Bitcoin’s 35% plunge since early October stems from five interconnected factors: broad risk-off investor sentiment, a hawkish Federal Reserve, the stalled CLARITY Act legislation, waning institutional interest, and profit-taking by long-term holders. Unlike previous cryptocurrency crashes driven primarily by retail speculation, this downturn has occurred amid substantial institutional participation, policy developments, and global macro trends. The bank’s analysts expressed uncertainty about whether Bitcoin will stabilize after this correction, noting the complex interplay of these factors.

The scale of the sell-off has been staggering, with nearly $5 billion exiting Bitcoin and other crypto-linked exchange traded products over the six-week period. The total crypto market capitalization has fallen approximately 24%, representing a $1 trillion decline since its October peak. This volatility has tested investor commitment to maintaining Bitcoin in their portfolios, with billions worth of crypto derivatives contracts being liquidated as futures traders attempt to navigate the turbulent market conditions.

This market downturn represents a fundamental shift in Bitcoin’s market dynamics. Deutsche Bank analysts emphasized that unlike prior crashes driven by retail speculation, this year’s decline has occurred with substantial institutional participation. The correlation data reveals Bitcoin has behaved more like a high-growth tech stock than an uncorrelated store of value. The average daily correlation between Bitcoin and the Nasdaq 100 index (QQQ) in 2025 year-to-date stands at 46%, while correlation with the S&P 500 (SPY) has risen to 42%. Both correlations have sharply increased in recent weeks, reaching levels similar to those observed during the COVID-driven market stress of 2022.

Federal Reserve policy has played a crucial role in this downturn. Remarks from Federal Reserve Chairman Jerome Powell and Fed Governor Lisa Cook dashed investor hopes for interest rate cuts during the December FOMC meeting. This year to date, Bitcoin’s correlation of returns with Fed interest rates stands at -13%, indicating that uncertainty around the Fed’s interest rate trajectory may continue to spur further declines in Bitcoin’s performance. Meanwhile, traditional defensive hedges like gold and U.S. treasuries have steadily outperformed Bitcoin in recent months.

The October crash triggered a severe liquidity crisis that continues to haunt Bitcoin markets. According to data from Kaiko Research cited by Deutsche Bank, order books across major crypto exchanges declined significantly during the initial crash, with ask-side liquidity effectively absent for several minutes. This liquidity gap amplified the price impact and reduced market-maker willingness to provide liquidity, creating a negative feedback loop between declining liquidity and falling prices.

The dislocation from the October crash has set the tone for Bitcoin’s performance, with market makers remaining spooked and slow to rebound. This liquidity deterioration represents more than just a one-day event—it has created persistent market weakness as reduced market-maker participation continues to exacerbate price movements. The combination of institutional selling pressure, Federal Reserve uncertainty, and deteriorating liquidity has created a perfect storm for Bitcoin, challenging its narrative as a reliable store of value during market stress.