Bitcoin Hits “Fire-Sale” Valuations as Fear Peaks and Contrarian Signals Flash: Bitwise

Crypto markets and Bitcoin endured another volatile week as a combination of heavy exchange-traded product (ETP) outflows, aggressive futures liquidations, and renewed macro uncertainty pushed prices sharply lower, according to Bitwise’s latest Weekly Crypto Market Compass report.

The sell-off unfolded against a backdrop of heightened sensitivity to U.S. monetary policy after the nomination of Kevin Warsh as a new governor of the Federal Reserve. Warsh is widely perceived as a policy hawk, a stance that typically weighs on risk assets such as Bitcoin and broader crypto markets. 

While the nomination sparked near-term volatility, the rate outlook that followed was far from straightforward.

Hawkish Signals Meet Mixed Rate Expectations

Following Warsh’s nomination, interest-rate expectations shifted in opposing directions. Markets began pricing in a greater likelihood of rate cuts in the near term, while longer-term expectations moved the other way, implying fewer cuts over an extended horizon.

Notably, Warsh has previously described BTC as a “good policeman for policy,” suggesting its price can serve as a warning signal when monetary or fiscal conditions become too loose. Despite this more nuanced view, traders appeared to focus on the broader implication of tighter policy discipline, accelerating de-risking across crypto markets.

Forced Selling and ETP Outflows Drive the Drawdown

The macro jitters coincided with substantial mechanical pressure in derivatives and fund flows. Crypto assets sold off sharply as long futures positions were liquidated en masse, amplifying downside momentum. Several consecutive days saw long liquidations approaching historic extremes, reflecting a rapid unwinding of leveraged exposure.

At the same time, global crypto ETPs recorded another week of heavy redemptions. Across all crypto-linked products, net outflows totaled more than $1.7 billion, marking a second straight week of withdrawals exceeding $1.8 billion. 

Bitcoin-focused products bore the brunt, with U.S. spot BTC ETFs accounting for the majority of the outflows, while Ethereum products also saw meaningful redemptions, according to the report.

Despite the broad-based selling, hedge fund positioning told a more nuanced story. Bitwise data showed global crypto hedge funds increasing their beta exposure to Bitcoin, suggesting that some institutional investors were selectively adding exposure even as prices fell.

Valuations Sink to Historic Lows

While price action deteriorated, valuation metrics moved decisively into territory rarely seen in Bitcoin’s history. Bitwise highlighted that BTC’s two-year rolling Market-Value-to-Realized-Value (MVRV) z-score has fallen to the lowest level ever recorded. Historically, similar readings have coincided with periods of deep undervaluation and have often preceded longer-term recoveries.

On-chain data reinforced the picture of stress. Bitcoin briefly slid to around $74,700, extending below prior cycle lows and marking a drawdown of nearly 40% from the cycle peak. Roughly 78% of invested capital is now estimated to be underwater, with unrealized losses swelling to levels last seen during the FTX collapse.

Capitulation dynamics are intensifying as well, particularly among short-term holders, though losses among long-term holders are also beginning to rise. 

Even so, Bitwise noted that realized losses remain modest relative to Bitcoin’s total capital base, leaving open the question of whether a final capitulation event is still ahead or whether selling pressure is already nearing exhaustion.

Contrarian Signals and a Reflation Backdrop

Against this bleak sentiment, several contrarian indicators are beginning to align. 

Bitwise’s in-house Cryptoasset Sentiment Index has plunged to extreme bearish levels, comparable to those seen during major liquidation events in past cycles. Historically, such readings have often coincided with attractive entry points for long-term investors.

Beyond crypto-specific signals, cross-asset trends are also offering cautious optimism. A renewed rally in precious metals and improving regional purchasing managers’ data point toward a potential global reflationary phase. 

Bitwise emphasized that upturns in the ISM Manufacturing Index have historically coincided with bull runs in Bitcoin and other crypto assets, raising the possibility that macro conditions could turn more supportive.

In the near term, technical dynamics may also matter. The recent sell-off created one of the largest CME futures price gaps on record, and historically, more than 90% of such gaps have closed within the following week, increasing the probability of a short-term rebound toward the $80,000 level.

An Asymmetric Setup Emerges

Taken together, Bitwise argues that the current environment presents an asymmetric risk-reward profile. 

Bearish sentiment, “fire-sale” valuations, and early signs of global reflation contrast sharply with the intensity of recent selling. While risks remain elevated and volatility is likely to persist, the convergence of extreme pessimism and historically low valuation metrics suggests that Bitcoin and broader crypto markets may be closer to a bottom than to the start of a prolonged downturn.

For now, markets remain fragile. But as Bitwise’s report makes clear, periods of maximum stress have often sown the seeds for the next phase of recovery.