The real reason behind the crypto market crash: $5.5 trillion stock market losses and risk sentiment shift

Original title: The REAL reason markets are crashing:

Original author: The Kobeissi Letter

Original source: https://x.com/

Translated by: Daisy, Mars Finance

The real reason for the market crash:

Over the past two months, the S&P 500 and cryptocurrencies have lost more than $5.5 trillion in market cap.

We have just witnessed one of the most sudden emotional shifts since 2020.

what happened? Let's explain.

Let's start with the timeline:

The market had foreseen the coming of a trade war as early as mid-2024.

In December, tariff threats intensified and we have since seen the S&P 500 hit multiple all-time highs.

Even after the trade war officially began on February 1, we still saw more all-time highs.

Since February 20, the S&P 500 has wiped out an astonishing $4.5 trillion market capitalization.

Over the past 13 days, this amounted to a loss of about $350 billion in market capitalization per day.

Nasdaq is now only 8% away from entering a bear market, the first time since 2022.

What exactly changes so quickly?

The trade war is just a scapegoat.

The real reason for the market decline is the sudden change in risk appetite.

We turned from extreme greed to extreme fear in just a few days.

The market position is so extreme that we have completely turned to the opposite direction.

What’s more interesting is that institutional capital has withdrawn before tech stocks fell.

Entering 2025, hedge fund exposure to the "Seven Bigs" stocks fell to its lowest point in 22 months.

Look at the differences between Nasdaq and fund positions.

On February 9, institutional investors established the largest short position in Ethereum in history.

At the same time, retail investors flocked to the cryptocurrency market, hoping to introduce US strategic reserves.

Even if almost all Trump’s bullish promises have been fulfilled, the cryptocurrency market remains down more than $1 trillion.

Cryptocurrencies further strengthen our argument:

Take a look at all the bullish cryptocurrency developments over the past two months.

Even the US Bitcoin reserves have become a "news selling" event.

So, what has changed?

Obviously, it is a sudden change in risk appetite.

In December 2024, market sentiment was so bullish that Apollo released its 2025 risk assessment, predicting a 0% chance of a U.S. recession.

Meanwhile, they predict a 90% chance of tariffs being imposed in 2025.

The market has long known about the tariff situation, and the market decline is not entirely due to tariffs.

Cryptocurrencies and stocks’ fear and greed index has dropped to its lowest point since the 2022 bear market.

Last year, the cryptocurrency greed index reached above 92; now it has dropped to the exact opposite 17.

Sentiment is the ultimate driver of price in any market, regardless of fundamentals.

When sentiment shifts so rapidly, capital outflows reached record highs, leading to the “flash crash” we see.

In the last week of February, cryptocurrency funds experienced a record $2.6 billion outflow.

This figure is about $500 million higher than the previous record set in 2024.

Last week, US small-cap funds experienced a $3.5 billion outflow, the highest since December 18.

The outflow of mid-cap funds was US$2.1 billion.

Industry funds experienced a $4.5 billion outflow, of which $1.9 billion outflow was reported in technology industry funds alone.

Another change in position occurred.

This means that taking action before mood changes will be the most profitable strategy in 2025.

As the Volatility Index ($VIX) soars more than 70% in a month, market volatility will intensify.

We expect the Dow Jones Index to fluctuate above 1,000 points, and this phenomenon will become the norm.

Through technical analysis and fundamental analysis, we have been trading these volatility.

Stocks, commodities, bonds and cryptocurrencies are now perfect for trading.

Want to see how we trade?

Please subscribe to our advanced analytics and alerts via the link below:

Finally, cryptocurrencies and stocks are becoming more and more unilateral.

The days of decline are deep red and vice versa, which is another sign of a change in risk appetite.

Emotion is the ultimate driver of price.