Understanding Bitcoin’s Downward Slide After a Record High in October

Source: The Indian Express

Relevance:
GS Paper 3 – Indian Economy, Financial Markets, Cryptocurrency Regulation, Emerging Technologies

Important Key Concepts for Prelims and Mains:

For Prelims:

Bitcoin, Cryptocurrency, Blockchain Technology, Central Bank Digital Currency (CBDC), Satoshi Nakamoto, Bitcoin Halving, Bitcoin ETFs, Digital Gold, Fiat Currency.

For Mains:

Impact of cryptocurrency on Indian economy, Cryptocurrency market volatility, Impact of monetary policy on digital assets, Risk sentiment in global markets, Safe-haven vs risk asset behaviour.

Why in News?

Bitcoin has fallen sharply from its record high of $126,000 in October 2025 to below $85,000, wiping out nearly $1 trillion in crypto market value.
This decline has fuelled concerns of an upcoming “crypto winter” — a prolonged phase of low prices, low trade volumes, and weakened investor confidence.

Basics of Crypto Currency

What is a Cryptocurrency?

A cryptocurrency is a digital or virtual currency secured through cryptography.
It operates in a decentralised ecosystem, without control by any state, central bank, or financial institution.
Popular examples include Bitcoin, Ethereum, Litecoin, Ripple, and Bitcoin Cash.

How Does Cryptocurrency Work?

All transactions are recorded on a blockchain, a distributed digital ledger maintained by a global network of computers.
Every new transaction is verified and added to this ledger via cryptographic processes.
Users transact using a digital wallet, which stores their public and private keys.
Cryptocurrencies can be mined, where computers solve complex mathematical problems to validate transactions and receive crypto rewards.

What is Blockchain Technology?

A decentralised, tamper-resistant ledger that maintains records across distributed nodes.
Each block contains verified transactions, cryptographically linked to previous blocks.
Ensures transparency, security, and immutability.
Though foundational to Bitcoin, blockchain has wider applications (supply chain, governance, health records).

Examples of Major Cryptocurrencies

Bitcoin (BTC)

First decentralised cryptocurrency (2009), created by Satoshi Nakamoto.
Based on a peer-to-peer network; capped at 21 million coins.

Ethereum (ETH)

A blockchain supporting smart contracts and decentralised applications (dApps).
Ether functions as native currency.

Litecoin (LTC)

Faster block generation time than Bitcoin; suited for small, quick transactions.

Ripple (XRP)

Designed for fast, low-cost global payments.
Works on the Ripple Protocol for cross-border transfers.

Bitcoin Cash (BCH)

Result of a Bitcoin hard fork (2017); larger block size for faster, cheaper transactions.

Legal Status of Cryptocurrency

In India

2013–2017: RBI issues repeated warnings; crypto not banned but considered risky.
2018: RBI imposes a banking ban—exchanges lose access to banks.
2020: Supreme Court lifts RBI ban; crypto trading becomes fully legal again.
2022: Govt imposes 30% tax on gains + 1% TDS; crypto formally recognised as Virtual Digital Assets (VDAs), but not legal tender.
2022–23: RBI launches Digital Rupee (CBDC) pilots; clear distinction made between CBDC (legal tender) and private crypto (not legal tender).
2023: Crypto exchanges brought under FIU-IND, mandatory KYC & AML compliance.
2024–25: Crypto fully legal to own, trade, and invest; still treated as digital assets, not currency; payment use limited due to taxes.
2025: Crypto is legal in India, heavily regulated, taxed at 30% + 1% TDS, not legal tender, and treated strictly as an investable digital asset, while CBDC is the only authorised digital currency.

Globally

Legal tender: El Salvador, Central African Republic.
Regulated acceptance: Japan, South Korea, Germany, Switzerland.
Restrictions or bans: China, Russia.

India’s CBDC (Digital Rupee)

Pilot launched by RBI; CBDC is sovereign digital money, equivalent to fiat currency.
Unlike crypto, CBDC is centrally issued, regulated, and fully backed by RBI.

Digital Rupee (e₹) – India’s Central Bank Digital Currency (CBDC)
The Digital Rupee (e₹) is India’s official Central Bank Digital Currency, issued and regulated by the Reserve Bank of India (RBI). It is the digital form of the Indian Rupee, having the same legal status and value as physical currency.
Key Features
- Issued by RBI: Backed by the sovereign, just like physical cash.

1 e₹ = 1 physical ₹.
Stored in a Digital Wallet: Users keep e₹ in a mobile wallet provided by RBI-authorised banks.
Cash-like Behaviour:
- Instant settlement
- Finality of payment
- Can be used offline (in pilot phase)
Use Cases: Person-to-person (P2P), person-to-merchant (P2M) payments, retail purchases, and business transactions.
The logo and tagline for India’s CBDC is

Challenges Associated with Cryptocurrencies

High volatility makes them unreliable for payments.
Regulatory vacuum creates uncertainty for investors.
Security risks, including exchange hacks and wallet breaches.
Low global adoption for everyday transactions.
Scalability constraints affecting transaction volume and speed.
Huge energy consumption during mining, adding to environmental concerns.

Why Bitcoin Is Falling

1. US Interest Rate Concerns

On December 10, the US Federal Reserve cut interest rates by 25 basis points.
Expected to boost risk assets like Bitcoin — but the Fed signalled:
No further rate cuts for now
Concern about overstated job growth
Higher interest rates →
Higher returns from savings
Lower appeal for risky, non-yielding assets like crypto
Dampened consumer sentiment

This uncertainty directly triggered speculative selling.

2. Market Jitters After the 10/10 Bitcoin Crash

• On October 10, former US President Trump threatened 100% tariffs on Chinese goods.
• Result:
✔ Panic among institutional investors
✔ $19 billion in leveraged trades liquidated
✔ $500 billion wiped out within hours

This mass liquidation broke investor confidence and created a self-reinforcing downward trend.

3. Rise in Bearish Sentiment Across Global Markets

• Global tech stocks (50% of market weight) witnessed a sharp decline.
• Fear of a possible AI bubble burst increased overall risk aversion.
• Investors shifted money from risk assets → safe assets (cash, bonds, gold).

Bitcoin, being a high-volatility asset, became an immediate casualty.

4. Bitcoin’s Failure to Behave Like “Digital Gold”

• If Bitcoin were a true safe haven:
– It should behave like gold
– Gold rises in uncertain markets
• But Bitcoin continues to show:
✔ Positive correlation with stock markets
✔ High sensitivity to risk cycles

Thus, Bitcoin remains a speculative asset, not a stable store of value.

5. Long-Term Holders Selling Large Volumes

• 800,000 Bitcoins offloaded within a month after October crash.
• Institutional exit worsened downward pressure.
• Existing traders feared further dip and followed suit → cascading selling.

Why Fears of a Crypto Winter May Be Exaggerated

1. Historical Halving Cycle Supports Recovery

• Bitcoin follows a four-year halving cycle.
• Halving reduces mining rewards by 50% → reduces supply → boosts price.
• Last halving: April 2024.
• Historically:
– Prices peak soon after halving
– Followed by correction
– NOT an immediate crash of 70–80% (not happened yet).

Thus, the present fall is a normal correction.

2. Bitcoin ETFs: Major Stabilising Force

• In January 2024, the US approved Bitcoin Exchange-Traded Funds (ETFs).
• These ETFs now hold 1.4 million Bitcoins — about 6.8% of total supply.
• This does 3 things:
✔ Brings institutional legitimacy
✔ Attracts traditional stock-market investors
✔ Reduces extreme volatility

ETFs are preventing a deep winter-like crash.

3. Pro-Crypto Policy under Current US Government

• Trump’s administration has taken pro-Bitcoin actions:
– Executive order to create a US Bitcoin Reserve (March 2025)
– GENIUS Act (June 2025) regulating stablecoins

This regulatory clarity attracts new investment and reduces panic.

Way Forward

Clear regulatory frameworks are essential for safe adoption.
Balanced oversight can prevent fraud while encouraging innovation.
Lessons from countries recognising crypto can guide India’s approach.
India can integrate learnings from its CBDC pilot to shape a structured crypto policy.
Classifying crypto assets clearly (as commodities, assets, or currency) is essential for taxation and regulation.
Completely banning crypto may curb innovation; a well-regulated ecosystem offers a better pathway.

UPSC PYQ

Q. With reference to “Blockchain Technology”, consider the following statements: (2020)

It is a public ledger that everyone can inspect, but which no single user controls.
The structure and design of blockchain is such that all the data in it are about cryptocurrency only.
Applications that depend on basic features of blockchain can be developed without anybody’s permission.

Which of the statements given above is/are correct?

(a) 1 only
(b) 1 and 2 only
(c) 2 only
(d) 1 and 3 only

Ans: (d)

CARE MCQ

Q. Consider the following statements regarding cryptocurrencies:

They operate in a decentralised ecosystem without control of a central bank.
All cryptocurrency transactions are recorded on a blockchain.
Cryptocurrencies can be used only through physical tokens issued by governments.

How many of the above statements are correct?

A. Only one
B. Only two
C. All three
D. None

Answer: B

Explanation:

Statement 1 – Correct: Cryptocurrencies are decentralised and not controlled by states or central banks.
Statement 2 – Correct: Transactions are recorded on a blockchain, a distributed digital ledger.
Statement 3 – Incorrect: Cryptocurrencies are digital/virtual, not physical or government-issued.