Bitcoin Drops 53% - An Allegory on How Derivatives Markets Replace Price Discovery

Bitcoin has experienced a sharp decline of 53% in just 120 days without any major negative news or events, which is unusual. This situation is not simply due to macroeconomic pressures but represents a profound transformation in the pricing mechanism. To understand this, we can use a simple allegory: if Bitcoin used to be valued like an actual house with buying and selling gestures, today it is valued like a piece of paper certifying that house, which is traded millions of times across different markets.

How Bitcoin’s Valuation Has Changed: From Actual Supply to ‘Synthetic Supply’

The original valuation model of Bitcoin was based on a simple principle: a fixed supply of 21 million coins, with the price determined by those who buy and sell these real coins. In the early cycles, this was largely accurate.

However, the current structure has undergone a significant distortion. Most Bitcoin trading no longer occurs on spot exchanges but through a complex system of derivatives markets. This is an allegory of “price duplication”: instead of trading actual Bitcoin, investors trade futures contracts, perpetual swaps, options, ETFs, and other structured products. All these tools allow exposure to Bitcoin’s price without the actual Bitcoin moving on the blockchain.

Derivatives – The ‘Mirror of the Mind’ of Bitcoin’s Price

This change has profound implications: selling pressure can come from derivative positions rather than from actual Bitcoin holders selling. This allegory is like a magic mirror—when institutions open large short positions on futures markets, the price can fall even if no Bitcoin is actually sold. This amplification effect becomes extremely dangerous when leveraged long investors are liquidated. In such cases, forced selling occurs through derivatives, creating a psychological flow effect—liquidations accelerate the decline, triggering more liquidations in a feedback loop, forming a downward spiral.

That’s why recent sell-offs appear very structured: you see long liquidation waves, funding rates turning negative (indicating sellers are overwhelmed), open interest collapsing. All signs point to derivative positions, not actual Bitcoin holdings, driving the price movements.

When Global Risk Increases: Bitcoin at the ‘Extreme End’ of the Risk Curve

But this decline isn’t just about derivatives. All risky assets are experiencing a correction. Stocks are down. Gold and silver are volatile. Global markets are entering a “risk-off” mode—where investors withdraw from high-risk assets. This allegory can be visualized as a risk curve from cash to high-risk assets, with Bitcoin at the far end. When markets shift to risk aversion, capital is first pulled from Bitcoin.

This explains why Bitcoin has fallen more sharply than traditional stock markets. It’s not due to specific bad news about Bitcoin but because of its relative position within the global financial system.

Macro Factors: A ‘Perfect Storm’ for a Selloff

Beyond these pressures, several macro factors are creating a “perfect storm” for the decline:

Geopolitical Uncertainty: Tensions around global conflicts, especially developments between the US and Iran, are creating instability. Whenever geopolitical risks rise, markets shift to risk aversion, and risky assets are sold off.

Fed Liquidity Expectations: The market had priced in a more accommodative liquidity environment, but expectations around the Fed’s future stance have changed. If investors believe policy will tighten even if interest rates are ultimately lowered, risky assets will be priced lower.

Weak Economic Data: Recent indicators on labor market trends, housing demand, and credit pressures point to a slowdown in growth. As recession fears grow, investors reduce risk, and highly volatile assets like cryptocurrencies are most affected.

The Difference Between ‘Planned Selling’ and ‘Panic Selling’

An important observation: this sell-off doesn’t look like panic liquidation. It appears structured. Consecutive red candles, controlled downward moves, and liquidation driven by derivatives—all suggest large entities are systematically reducing exposure, not panicking small investors. This allegory is like the difference between a calculated liquidation of a company versus a fire sale driven by fear—completely different approaches.

As institutional positions decrease, they dampen recovery efforts. Dip buyers wait for stability before re-entering, creating additional downward pressure at lower price levels.

Combining All Factors

The current decline isn’t caused by a single reason but by a combination of factors:

• Price discovery driven by derivatives rather than actual supply
• Exposure to synthetic supply amplified through leverage
• Global risk flows shifting into risk-off mode
• Changing expectations about liquidity policies
• Geopolitical uncertainty
• Weak macroeconomic data
• Reduced institutional positions in a planned manner

Bitcoin’s current price (around $68.07K as of February 2026) reflects all these pressures. Until these factors stabilize, recovery efforts may occur, but maintaining an upward trend becomes more difficult as market structure allegories continue to dominate price action over fundamental demand.