Invested in crypto? Bitcoin may be headed for a 2020-like crash? Here's what an industry expert has to say

If you’re holding Bitcoin or other cryptocurrencies, you might want to rethink your position. Tara McAulay, CEO of Pharos Fund and former co-founder of Alameda Research, has raised concerns about a potential market crash that could echo the 2020 meltdown, reported The Street.

Expert warns of potential market crash

McAulay warned that traders may be underestimating the risks of a large-scale liquidation event occurring in the next three months, or over the course of 2025, as per the report. While Bitcoin has been experiencing low volatility recently, leverage in the market is quietly on the rise, and that could set the stage for a dramatic price drop, reported The Street.

According to The Street, she drew parallels between today’s market and March 2020, when Bitcoin futures plummeted by 85% in just one day, sparking one of the biggest liquidation events in crypto history. During that crash, Bitcoin’s market value dropped by nearly $40 billion, sinking to around $107 billion, according to CoinMarketCap.

Are traders taking too much risk?

McAulay pointed out that many Bitcoin traders are leveraging their positions with a 6x or 7x margin, betting that Bitcoin’s price won’t fluctuate too much, as per the report. But, she cautioned, even a modest 20% price drop could trigger a “cascade of liquidations,” causing massive sell-offs and potentially spiralling into a market crash, reported The Street.

Adding to the risk, the crypto lending landscape has shifted significantly since 2022. Unlike before, when leverage was spread out off-exchange, more leverage is now concentrated on exchanges, reported The Street. This means that if a price drop happens, the liquidation process could be much faster and more severe.

Could Bitcoin already be in a bear market?

McAulay also suggested that Bitcoin may already be in the early stages of a bear market, though most investors don’t realize it yet, as per The Street. She explained that it often takes a few months of declining prices for people to officially label a market as a bear.

One major red flag she highlighted is the steep drop in trading volumes, which is down 40% since December. While Bitcoin ETFs have continued to attract institutional investors, retail participation has waned, and fewer fresh funds are flowing in, as per The Street.

According to McAulay, "If we get a drop in those inflows, if they pause, if there's anything that spooks people, and you combine that with the selling activity we're already seeing, you could get a big crash,” as quoted by The Street.

Bitcoin was trading at $96,289.79, showing a drop of 0.7%, as of February 20.

FAQs

Should I worry about Bitcoin?
Crypto expert Tara McAulay has raised concerns that Bitcoin could be heading for a big crash, kind of like what happened in 2020. She claimed that many traders are overlooking some risks, especially with how much leverage is creeping into the market.

Is Bitcoin already in a bear market?
McAulay claimed that we might already be in the early stages of a bear market, even if many people haven’t noticed yet. Typically, it takes a couple of months of falling prices before the market officially calls it a bear market.