How is Bitcoin Toppling U.S. Stocks?

Recently, while explaining the reasons for the sharp volatility in the two major markets, many traders have pointed the finger at leveraged trading and the impulse to take profits before the year-end.

In recent years, both Wall Street and ordinary investors have increasingly used margin leverage to amplify their market bets. According to statistics from the Financial Industry Regulatory Authority (FINRA), borrowing in brokerage accounts exceeded $1.1 trillion at the end of October, hitting a record high. Morningstar data also shows that assets in leveraged stock funds surged to over $140 billion this autumn, the highest level since records began in the 1990s.

While such leverage can indeed amplify the returns of bullish bets during market upswings, it can also rapidly worsen situations during turbulent times, forcing investors to sell off their holdings to meet margin calls from lenders. Simultaneously, many equity traders who hold high-risk leveraged positions often also attempt to magnify their bullish trades on Bitcoin. When Bitcoin prices fall, these traders may suffer substantial losses.

Benn Eifert, Managing Partner of San Francisco investment firm QVR Advisors, pointed out: "There is a group of over-leveraged market participants who are long both cryptocurrencies and bubbly tech stocks. When their cryptocurrency positions get liquidated, they sell tech stocks to raise cash."

Beyond this, the human tendency to "take money off the table" may also be exacerbating stock market volatility. Investors are still sitting on substantial profits in mainstream U.S. markets this year—the S&P 500 is up 12% year-to-date, and the bond market is having its best performance since 2020. Meanwhile, the plunging Bitcoin has completely erased its year-to-date gains this month.

Hedge fund traders often develop "risk aversion" towards the year-end—fearing that a market reversal could cause their substantial bonuses to slip through their fingers. If the market weakens around this time each year, they often rush to sell stocks, especially when they see many crypto traders ending the year empty-handed or even wiped out...