Author: Zhao Ying, Wall Street Insights

Michael Burry, the "big short" famous for successfully predicting the 2008 U.S. housing market crash, warned that Bitcoin has plummeted 40% and that if it continues to fall, it may cause lasting damage to companies that have accumulated large amounts of the asset in the past year. He believes that Bitcoin has proven to be a purely speculative asset and has failed to serve as a hedging tool like precious metals.

Burry pointed out in a Substack article published on Monday that if Bitcoin falls another 10%, Strategy Inc., one of the most aggressive Bitcoin inventory companies, will suffer billions of dollars in losses and will basically be unable to enter the capital market. He warned that Bitcoin's decline could trigger "catastrophic consequences", including being transmitted to the wider market and causing a "collateral death spiral" in tokenized metals futures.

The warning came as Bitcoin continued its plunge on Tuesday, falling below $73,000 at one point, erasing all gains since Trump's re-election in November 2024. The digital currency has fallen more than 40% since hitting all-time highs in early October.

Despite Burry's warning, the cryptocurrency market is still small and unlikely to cause widespread contagion. Bitcoin’s market capitalization is less than $1.5 trillion, household holdings are limited, and corporate adoption is narrow, suggesting any wealth effects are likely to remain manageable.

Bitcoin exposes its speculative nature and fails to become a safe haven asset

In the article, Burry pointed out that Bitcoin failed to respond to typical drivers such as U.S. dollar weakness or geopolitical risks, while gold and silver hit all-time highs due to concerns about U.S. dollar depreciation caused by global tensions. "Bitcoin has no organic use case to slow or halt its decline," Burry said.

According to Bloomberg, analysts attributed Bitcoin’s decline to multiple factors, including the disappearance of capital inflows, shrinking liquidity, and a broad loss of macro attractiveness. Many crypto-native traders are also cooling off on the token economy, turning to event betting with the rise of prediction markets.

Bitcoin fell over the weekend to its lowest level since tariffs sparked turmoil last year and continued its decline on Tuesday. This performance contrasts with the arguments of its long-term supporters, who believe that Bitcoin’s fixed supply puts it on par with gold.

Treasury companies are under tremendous pressure

Burry warned that Bitcoin’s adoption by corporate finance and the launch of new cryptocurrency spot exchange-traded funds will not be enough to support its price indefinitely or prevent catastrophic consequences if it falls sharply. He noted that nearly 200 publicly traded companies hold Bitcoin.

While this helps expand demand, "inventory assets are not permanent," he wrote. Inventory assets must be marked to market and included in financial reports. If Bitcoin prices continue to fall, risk managers will start recommending that their companies sell.

Burry specifically mentioned that if Bitcoin falls by another 10%, Strategy Inc., the most aggressive Bitcoin inventory company, will fall into billions of dollars in losses and find that the capital market is basically closed to it. He described these "disgusting scenes that are now within reach".

ETFs intensify speculation and increase market correlation

Burry added that the emergence of spot ETFs has only exacerbated the speculative nature of Bitcoin, while also increasing the token’s correlation with the stock market. He wrote that Bitcoin’s correlation with the S&P 500 has recently been close to 0.50. In theory, when losing positions start to grow, liquidations will be actively initiated.

Burry noted that Bitcoin ETFs have been recording some of their largest single-day outflows since late November, with three of those occurring in the last 10 days of January.

This trend suggests that institutional investors’ confidence in Bitcoin is waning, and that ETFs, originally seen as a tool to expand Bitcoin adoption, may instead accelerate selling when the market declines.

Warning about "collateral death spiral" risk

As Bitcoin continues to fall below certain key levels, Burry believes it is being passed on to the broader market. He pointed to the decline in cryptocurrencies as part of the reason for the recent crash in gold and silver, as corporate treasurers and speculators needed to reduce risk by selling profitable positions in tokenized gold and silver futures.

These tokenized metal futures are not backed by actual physical metals and could overwhelm physical metal trading, leading to a "collateral death spiral," he said.

"It looks like as much as $1 billion in precious metals was liquidated at the end of the month as cryptocurrency prices fell," Burry wrote. If Bitcoin falls to $50,000, miners will go bankrupt and "tokenized metal futures will collapse into a black hole with no buyers," he said.