Crypto assets plummet, short-term trading fades away "Trump fever"?

Zhitong Finance APP learned that for months, cryptocurrency-loving investors have invested billions of dollars in leveraged strategies, expecting Trump to remove regulations on the emerging industry in preparation for a new world of digital prosperity. But now, short-term traders betting on cryptocurrencies are bearing the brunt of Wall Street's massive sell-off - driven by concerns about Trump's volatility-inducing policy agenda. Digital assets have performed particularly poorly, in part because people are disappointed that Trump's industry policies have not met expectations.

Exchange-traded funds (ETFs) are the best example, seeking to provide rich returns on various virtual currencies or cryptocurrency-related themes. The biggest declines on Monday were two ETFs that provide leveraged bets for Strategy (MSTR.US), both of which fell more than 30% on the day. Strategy is a Bitcoin holding company formerly known as MicroStrategy.

Another Robinhood Markets (HOOD.US) double-long fund fell 40%. Robinhood Markets is the favorite brokerage firm for cryptocurrency traders. Amid a broader sell-off in digital token markets, leveraged bitcoin funds lost about 20% and funds focused on Ethereum lost 26%.

The assets and companies that underpin leveraged funds can be seen as forming the linchpin of a crypto trading complex that has surged since Trump’s return to the White House. The U.S. president has embraced the digital asset industry, promising a strategic reserve full of tokens and previously fueling speculation by launching his own meme coin. Bitcoin and other cryptocurrencies have surged since the election.

Now, though, industry insiders are increasingly concerned about the Trump administration’s actions on crypto so far. Recent news about the strategic crypto reserve has been discouraging, as Trump said it would include lesser-known tokens XRP, SOL and ADA. Then, last Friday’s White House crypto summit “turned into a textbook PR exercise — heavy on appearances and light on substance.” Blockworks analysts wrote: “We remain largely on the sidelines.”

Cryptocurrencies continued to fall on Tuesday. Bitcoin fell back below $78,000 per coin, down 0.88% on the day. Ethereum fell more than 5.00% during the day and is now at $1,768 per coin, a new low since November 2023.

Cryptocurrency ETFs have also suffered huge losses as investors have been alarmed by Trump's intermittent trade threats and Elon Musk's move to cut federal labor, and they are pricing in more and more recession signals. The S&P 500 has wiped out all its gains since the election, and speculative stocks involved in the "Trump trade" have fallen faster.

More and more economists are sounding the alarm about a potential recession. Earlier this month, a JPMorgan model showed that the market-implied probability of a U.S. recession has climbed to 31%, while a similar model from Goldman Sachs also showed that the risk of a recession is gradually rising. In such an environment, "you don't want to invest too much in these high-risk stocks," said Todd Sohn, senior ETF strategist at Strategas.

Trump himself has also said that the current market turmoil may be part of a necessary "transition" period as his new policies play a role in the economy. Michael O’Rourke, chief market strategist at JonesTrading, said it was understandable that speculative stocks were “being liquidated en masse” against this backdrop. “These are leveraged gambles, really gambles on the most speculative side of the stock market,” he said. “The way they’ve risen so much should have suggested that they could collapse just as quickly, if not faster.”

Two leveraged funds based on Strategy are down about 45% year to date. The GraniteShares 2x Long COIN Daily ETF (CONL.US), which aims to offer two times long trades on cryptocurrency exchange Coinbase Global, has fallen more than 55% since the end of 2024. Bitcoin itself is down 16%.

In early December, the $50 billion iShares Bitcoin Trust ETF (IBIT.US) saw its largest weekly inflow, when more than $2.6 billion flowed in, data showed. February, on the other hand, was the fund’s first and largest monthly flow, with nearly $800 million in outflows. So far in March, another $130 million has been siphoned out.

Also taking a hit are high-tech ETFs and funds tied to Musk, which were once seen as "water trades" among retail investors due to the tech billionaire's proximity to the White House. With Tesla's stock price plummeting, the Tesla Two-Times Long Fund (TSLL.US) has fallen more than 70% this year, relying on Tesla's famous volatility. The Palantir Technologies Inc. (PLTR.US) Two-Times Long Fund lost about 20% on Monday alone.

Perhaps no other fund has been hit as hard as Cathie Wood's ARK Innovation ETF (ARKK), which covers the concept of cryptocurrency and Musk complex. The fund has lost 16% so far this year. Investors have withdrawn about $240 million from the fund, following two consecutive years of total outflows of nearly $4 billion. ARKK's major holdings include Musk's Tesla, as well as shares of Coinbase, Robinhood and Palantir - all of which have been sold off recently.

“There are a lot of long-term upside drivers for cryptocurrencies, especially in terms of governments supporting cryptocurrencies,” said Roxanna Islam, head of industry and sector research at TMX VettaFi. “But the problem is that cryptocurrencies remain a risky asset that is priced largely based on emotion rather than rationality. It’s hard to have confidence in cryptocurrencies when there are so many concerns in the broader market.”