When leverage hides in plain sight
Bitcoin fell roughly 25% from its highs last week, dragging most digital assets down 15-30% in a matter of hours. The scale wasn't unusual for crypto. What was unusual was the speed, the uniformity across assets, and where it started.
The move wasn't driven by worsening fundamentals in crypto projects. Bitcoin led the selloff, and the correlation across assets was striking - not quite tick-by-tick, but close enough that it was clear something structural was driving the market rather than problems with individual tokens. The pressure transmitted instantly through new institutional infrastructure: ETFs, CME futures, and options markets. Many market commentators speculate that multi-strategy hedge funds running basis trades (buying spot via ETFs, shorting CME futures) were forced to unwind as the spread blew out from 3.3% to 9% overnight, as Jeff Park documented. Market makers pulled back across the board, repricing everything simultaneously.
We are focusing on the bigger picture: Bitcoin's volatility has actually been falling as the asset matures. But leveraged exposure built on top of it has been rising. Both can be true at once, and their interaction creates these sharp, fast selloffs even as the longer-term trend points toward calmer markets.
This is normal growing pains. Every major asset class goes through periods where rapid expansion of financial infrastructure creates unintended consequences.
The difference with crypto is that most traditional markets were built by institutions and then opened to retail. Crypto was built by venture capital and retail, and is now being retrofitted for institutional participation. The infrastructure has been bolted on rather than built from the ground up, which means the connections between these new channels are still being stress-tested in real time.
We've seen selloffs like this before. They look worse in the moment than they do with distance. What was encouraging: retail and retirement fund ETF investors bought the dip. Sticky money in, fast money out. That's a sign of a maturing investor base, and it creates opportunities for long-term holders who can look past the volatility.
A multi-speed market
The deeper takeaway isn't about who sold or why. It's that lumping everything under a single "crypto" label is increasingly reductive. Crypto spans many different sub-sectors and use cases - from settlement layers to trading platforms to consumer apps - but broadly, we're seeing three distinct stages of maturity emerging, each with different risk profiles.
The first stage includes Bitcoin, and to a lesser extent Ethereum and Solana, which are being traded by increasingly sophisticated participants alongside other macro assets like commodities and currencies. The depth of the options market, the CME activity, and the ETF flows suggest these assets are being incorporated into institutional positioning frameworks. Last week's selloff was driven largely by this institutional positioning, not by anything happening on the underlying blockchains.
The second stage is revenue-generating protocols. Protocols like Aave, Hyperliquid, Jupiter, and Ethena are generating real cash flows that can be analyzed using frameworks institutional investors understand. When you move past experimentation, revenue and the growth of that revenue become what matters. As DACM's CIO Richard Galvin has framed it, this represents the transition from the sandbox to the real economy.
The third stage is venture-stage experimentation across newer crypto-native applications. Decentralized social networks, on-chain gaming, AI-crypto infrastructure projects. Legitimate innovation, but many of these projects are still searching for sustainable business models and, crucially, remain less token-centric than earlier cycles. Sustainable value accrual to liquid tokens in this category remains a persistent challenge.
Looking beyond the correlation
Once you recognize that these stages behave differently, the framework shifts. Bitcoin's role looks increasingly like macro exposure with a particular (and compressing) volatility profile. Revenue-generating protocols look closer to growth equity, where earnings quality and addressable market matter. Venture-stage tokens carry corresponding risk and return characteristics, but are liquid, unlike traditional VC markets.
Right now, everything still trades together. That's what happens in nascent industries - we saw the same thing in the early internet era, when any tech stock moved with the "dot com" sector regardless of fundamentals. But as the market matures, investor education improves, and increasingly sophisticated participants enter, we believe this correlation will break down. That creates opportunity for fundamental, long-term investors who can look through the noise.
The dispersion is already starting to show up. Hyperliquid rose roughly 8% while the broader market fell 15-30% last week. That's what you'd expect when fundamentals start to matter more than flows.
The price action last week was severe, and the impact on portfolios was real. But zooming out, the infrastructure supporting this market continues to expand, the tools for institutional participation are multiplying, and the protocols generating real revenue continue to do so regardless of short-term price moves. Long-term conviction, grounded in fundamentals rather than positioning, remains the foundation of how we think about this space.
|
IMPORTANT NOTICE
This document has been prepared by Digital Asset Capital Management Inc (DACM, and together with its affiliates, related entities and subsidiaries, referred to as ‘we’, ‘our’ or ‘us’). It is for distribution to qualifying professional investors only to the extent permitted by law. It is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or would subject a DACM entity to any registration or licensing requirement within such jurisdiction.
This document is provided solely to recipients who are expressly authorized by DACM to receive it. If you are not so authorized you must immediately delete or destroy it.
DACM is registered as an ‘approved manager’ by the British Virgin Islands Financial Services Commission (FSC). It and any DACM managed fund is not licensed or subject to supervision of FSC or any other regulatory authority outside the British Virgin Islands, such that the requirements considered necessary for the protection of investors that apply to regulated funds in the British Virgin Islands do not apply to DACM or any DACM managed fund. This document has not been reviewed or approved by FSC or any other regulatory authority in any jurisdiction.
General information only. No advice or recommendation. This document does not constitute general advice or personal advice by DACM or any of its affiliated entities or funds in relation to a potential investment in any financial product. It is a general communication and is intended to be educational in nature. It is not an advertisement nor is it a solicitation or an offer to buy or sell any financial instruments, funds, coins or tokens (whether or not subject to securities regulation) or to participate in any particular trading strategy. In Australia, to the extent that this document may contain financial product advice, it is given by DACM Australia Pty Ltd ABN 50 624214 777 (DACM Australia), as corporate authorised representative No. 001293214 of Quay Wholesale Fund Services Pty Ltd AFSL 528526, only to ‘wholesale clients’ as defined under the Corporations Act 2001 (Cth). This document is not authorized for distribution to ‘retail clients’ as defined under the Corporations Act. To the maximum extent permitted by law, neither DACM Australia or Quay, nor their respective directors, employees or agents, accept any liability for any loss arising in relation to this document. Provision of this document is not, and should not be considered as, a recommendation in relation to an investment in any entity or that an investment in any entity is a suitable investment for any specific person. It does not take into account any person’s particular investment objectives, financial situation or needs.
Investment suitability. Recipients should make their own enquiries and evaluations they consider appropriate to determine the suitability of any investment (including regarding their investment objectives, financial situation, and particular needs) and should seek all necessary financial, legal, tax and investment advice. An investment in a DACM managed fund is subject to the fund’s offering memorandum, term sheet or other disclosure document, together with its memorandum and articles of association. Such an investment may be deemed speculative and high risk and should not be regarded as a complete investment program. Digital assets are subject to a range of specific risks associated with their particular features, in addition to the risks of investing in funds or financial assets generally, such as certain regulatory, technology, custody, price, valuation, liquidity, cybersecurity, exchange and market risks. An investment in a DACM fund may present a greater risk to an investor than investment in a regulated fund in the British Virgin Islands or elsewhere. The funds’ investments are subject to substantial market fluctuations and there can be no assurance that appreciation will occur or that material losses will not be realized. The value of investments may fall as well as rise. Past performance is not an indicator of future performance. DACM funds that are open for subscriptions are only available to qualifying professional or accredited investors in selected jurisdictions where an offer of shares is authorized under applicable law and the terms of the offering memorandum. They are designed only for experienced and sophisticated investors who are able to bear the risk of the substantial impairment or loss of an investment in the fund.
Material interests. We and our shareholders, directors, officers and/or employees may have material holdings in the investment funds, projects, coins or tokens referred to and may otherwise be interested in transactions that you effect in those funds. Our actual investment positions may not reflect some or all of the views presented due to a range of possible factors, such as client or fund investment restrictions, liquidity factors, portfolio rebalancing and transaction costs, among others.
No liability. DACM, its affiliated entities and funds, and their respective directors, related parties, representatives and employees, do not accept any liability for the results of any actions taken or not taken on the basis of information in this document, or for any misstatements, errors or omissions negligent or
otherwise, to the maximum extent permitted by law. No legal or other commitments or obligations shall arise by reason of the provision of this document or its contents except to the extent required by law.
Incomplete information. This document contains selected information and does not purport to be all-inclusive or contain all relevant information in relation to its subject matter. The information has not been independently verified and is provided on the basis that it will not be relied upon and that the recipient is capable of making its own independent assessment as to the validity and accuracy of the financial assumptions, data, results, calculations and forecasts contained, presented or referred to in the document, and the economic, financial, regulatory, legal, taxation, accounting and other implications of such. No independent third-party audit or review has been obtained or verified as having been undertaken by any third party of the sources, financial assumptions, data, results, calculations and forecasts contained, presented or referred to in this document. DACM does not undertake to update or keep current any information in the document.
Links. This document may provide links to websites and when you click on one of these links, you may be redirected to another provider's website. The inclusion of any link does not imply our endorsement or our adoption of the statements on the linked site or of the operator of the site. Linked sites and their providers are not controlled by us, and we are not responsible for their actions or the contents or the proper operation of any linked site. The links may not remain current or be maintained. We make no guarantees or representations as to, and shall have no liability for, any electronic content delivered by any third party, including, without limitation, the accuracy, subject matter, quality, sequence or timeliness of any electronic content.
Forward statements. This document may contain forward-looking statements, forecasts, historical performance, estimates, projections and opinions (Forward Statements). No representation is made or will be made that any Forward Statements will be achieved or are correct. Actual future results and operations could vary materially from the Forward Statements. Any projections or statements of past performance are provided for general reference purposes and Forward Statements may be based on assumptions relating to the general economy, markets or other factors beyond the control or knowledge of DACM. No representation is given that the assumptions disclosed in this document upon which Forward Statements may be based are reasonable, or that any prices or valuations provided represent DACM’s internal records or that a transaction can or could have been be effected at those prices or values. Any opinions expressed in this document may change without notice and may differ or be contrary to opinions expressed by other DACM representatives or documents. Any statements or data attributed to a third party represent DACM’s interpretation and have not been reviewed by the third party. Facts and circumstances may change and the contents of this report may become outdated or incorrect as a result.
Proprietary information. This document and its contents (including all DACM intellectual property) are propriety to DACM, and must not be reproduced, delivered or disclosed, in whole or in part, to any party other than the authorized recipient to whom this document is addressed, except with the prior written approval of DACM. Images or other data sourced from third parties may contain objects, data or elements that are protected by third-party copyright, trademarks and other intellectual property rights.
© Digital Asset Capital Management Inc. All rights reserved. |
|
