Bitcoin’s mid-cycle correction: Separating noise from signal | by James McKay | The Capital | Mar, 2025

After a euphoric run fuelled by post-election optimism, digital assets are now facing a sharp correction, shaking out weak hands and testing conviction across the market. Indeed, the end of February has seen no shortage of panic across the board, with Bitcoin retreating as much as 28% from its highs and major altcoins faring even worse.

Aside from the from the fact that this is very much in keeping with previous mid-cycle corrections (it’s actually quite a modest pullback on a relative basis), this may be the moment to remember that volatility is the ticket participants in these markets must pay for returns. You do not get one without the other, yet every such correction is invariably met with “bull run is over” headlines. And in an industry obsessed with daily price swings, it’s easy to get lost in the noise.

While some narratives are quick to blame policy shifts or isolated events like the Bybit hack, the reality is that Bitcoin is experiencing a familiar mid-cycle retracement which has always been an essential feature of the secular trend.

Bitcoin has never followed a straight line upwards and typically undergoes multiple 30–50% pullbacks before reaching new highs. In January 2021, for instance, Bitcoin experienced a 31% mid-cycle correction over a three-week period. But after the customary “the bull run is over” headlines, Bitcoin resumed its run for another 290 days and finished up +135% to cycle peak.

Figure 1: 30%+ mid-cycle corrections are standard during Bitcoin bull markets

Therefore, not only is what we’re seeing now in keeping with previous mid-cycle corrections (it’s actually quite a modest pullback on a relative basis), when zooming out on the charts we can see that Bitcoin isn’t anywhere near breaking its macro trend to the downside, meaning that the long-term outlook remains positive.

Figure 2: Bitcoin’s macro trend on the weekly remains intact

Unfortunately, long-term thinking isn’t the forte of many in the crypto community, nd here remains an undue focus on the immediate implementation of Bitcoin strategic reserve plans to bring about continued bullish momentum.

Figure 3: The rapid price rises since Trump’s victory have now morphed into fear

The rapid run-up in price was in part a “buy the rumor” Trump trade pegged to immediate strategic reserve purchases. The fact that this has so far failed to materialise has added to the current bearish sentiment, as the lack of instant, concrete action has disappointed some investors due to their own misplaced policy expectations.

However, this overlooks the fact that we’ve had more positive regulatory developments in the past year than over the previous four years combined. From a Digital Assets Working Group (that will develop a regulatory framework and help define what a digital asset is) to the repeal of SAB121 (which will allow mainstream financial institutions to custody crypto), we’re witnessing an unprecedented wave of positive industry developments.

This fact should not be forgotten due to price negative price swings, as the groundwork is being laid for long-term institutional adoption and these regulatory wins will translate into sustained market strength in due course.

Given Bitcoin’s surged 120% in 2024, the current wave of profit-taking should come as no surprise. At the same time, it’s undeniable that the $1.5 billion Ethereum exploit at Bybit on February 21 has accentuated the declines. Crypto hacks typically trigger knee-jerk reactions, but historically, their long-term impact on price is minimal. The Mt. Gox collapse, the Bitfinex hack, and even the FTX implosion were all followed by recoveries.

Leading the sell-offs were the spot Bitcoin ETFs which saw record outflows on February 25 totaling $1.01 billion, with 10 of 12 funds reporting net outflows. Looking at the global picture for all crypto ETPs and ETFs, this number stood at $1.7 billion, as noted by CoinShares.

Figure 4: Record ETF outflows in March reflect market fear and retail dominance

While the prevailing narrative around the recent streak of ETF selling evolves around institutional de-risking following months of inflows, we also need to weigh why we’re witnessing such huge outflow events if institutions are using these Bitcoin ETFs as ‘digital gold’ allocations. The simple answer to that is that contrary to popular belief, retail still dominates spot Bitcoin ETF flows, making these knee-jerk sell-offs more likely. For example, a report from Binance from October 2024 estimated the retail vs. institutional ratio for spot Bitcoin ETFs is 5:1.

Finally, the CME futures premium dropping to 4% suggests the easy ‘basis trade’ arbitrage opportunities (long ETFs, short futures) that hedge funds exploited are drying up. This could explain the mass exit, ergo when the yield vanishes, the pros cash out fast, leaving the retail majority to feel the aftershock.

Bitcoin’s 2024 rally suggested a decoupling from global liquidity, but the current downturn indicates that the relationship remains complex. Despite showing signs of independence, Bitcoin’s price action now appears intertwined with macro trends, potentially requiring a liquidity boost to reignite a sustained bull market.

Figure 5: An uptick in global liquidity will be key to bull run sustainability

Additionally, current economic data and hotter-than-expected inflation have reduced expectations for further rate cuts. This has in turn maintained upward pressure in 10Y yields, which are still hanging out around 4.3%-4.4%, and this environment has contributed to the pressure on Bitcoin by tilting the risk-reward balance away from digital assets (the same cannot be said for gold).

In terms of the developing trade war, it’s unclear exactly how Trump’s robust stance on tariffs will play out long-term. It has unquestionably pressured risk assets, however, with the Nasdaq losing all its gains YTD, dropping 8% by February 28th, and Bitcoin’s 18% drop only underscores this further. That being said, there are also signs that key economic data points are looking up, such as the ISM manufacturing index beating expectations in January for the first time since Covid.

Those familiar with Bitcoin’s cyclical behaviour will know that the current negative sentiment is precisely the environment that often precedes sharp snapbacks in price during bull cycles. Further, the frequent liquidations that we’re seeing are evidence of excess margin froth being drained from the market, which is part of the process of retesting prior levels to build a base for the resumption of the secular trend.

While the strategic bitcoin reserve will remain the low-hanging fruit for sentiment harvesting moving ahead, the continued progress on regulatory guidance (particularly with respect to lowering barriers for TradFi participation) is probably the single most bullish development currently at play in terms of US government policy. Here, it is unlikely that the axing of SAB121 is anywhere near priced in.

But rather than looking for immediate government intervention or short-term catalysts, the real story lies in the trifecta of structural forces driving Bitcoin’s long-term adoption, namely: continued strong ETF demand, rising corporate and sovereign adoption, and the creeping post-halving supply shock. These major drivers will continue to have a larger impact on performance long after the trade war trepidations have been digested by the marketplace.