The crypto market, AI, and US stocks are all closely linked, with everyone watching to see when the crypto market will stabilize.

Author: Ye Zhen, Wall Street Insights

As this quote on social media says: "We're all going long on Bitcoin, some of us just don't know it yet."

On November 24th, Peter Tchir, a renowned strategist at Academy Securities, warned in his latest report that with the end of the "free money" era, this hidden leverage is backfiring on the market.

The logic that companies could achieve several-fold increases in stock prices simply by announcing massive spending plans over the past two years has been shattered, and this reversal is becoming the core driver of the recent decline in the Nasdaq index. The recent market volatility has been extreme, with the Nasdaq 100 leading the decline, falling by more than 3%, while the more representative S&P 500 equal-weighted index fell by only 0.9%. This divergence highlights that the pain is mainly concentrated in the technology and high-growth sectors. In particular, on October 10th, Bitcoin experienced a sharp sell-off, plummeting from $122,000 to $105,000 during the US stock market close. This seemingly inexplicable collapse not only severely damaged crypto assets but also, through a chain reaction involving ETFs and related listed companies, created direct liquidity pressure on a broad range of stock portfolios. This phenomenon reveals a dangerous signal in the current market structure: cryptocurrencies, artificial intelligence infrastructure construction, and passive investment funds in US stocks have formed a highly correlated "iron chain." As passive investment surpasses active investment, hundreds of millions of dollars in retirement funds and hedging funds are effectively tied to the capital expenditure cycles of "digital asset reserve companies" like MicroStrategy and AI giants through ETFs such as QQQ. Currently, investors' attention has collectively shifted to the stability of the crypto market. **Goldman Sachs trader Brian Garrett bluntly stated that many clients are viewing Bitcoin's performance as a barometer of future risk appetite. "If Bitcoin's performance improves, the year-end stock market rebound may only then be back on track."** The Collapse of the "Free Money" Mechanism Peter Tchir, in his report, attributed the recent market boom to the "free money" effect. "Free money" doesn't refer to central bank liquidity injections, but rather to a specific phenomenon in corporate capital operations: when a company announces an expenditure of X amount, and its market capitalization increases by more than X, it essentially creates "free" shareholder wealth. This logic previously existed primarily in two areas: First, AI and data center construction. Previously, tech giants only needed to promise to build more data centers (the logic of "once built, customers will naturally come") to receive enthusiastic rewards from the stock market. However, now, simply announcing increased spending no longer translates into stock price increases, and the market is beginning to question the return on these massive investments. Once stock prices stop supporting these gains, companies are likely to cut spending, threatening overall economic momentum. Secondly, there are cryptocurrencies and "digital asset reserve companies" (DATs). Companies like MSTR once enjoyed huge valuation premiums, using financing to buy cryptocurrencies and driving stock prices far above their cost basis. This positive cycle was a key force supporting stock prices and the underlying crypto assets. However, this chain is now increasingly difficult to maintain, with many DATs trading at prices that are gradually reverting to and not closely tracking their net asset value (NAV), meaning the channel for "creating wealth out of thin air" is closing. The "amplifier" effect of passive investing exacerbates this complexity. Peter Tchir points out that when large amounts of money "blindly" flooded into the Nasdaq 100 Index (QQQ), **55 cents of every dollar flowed to a few companies, including MSTR.** According to Bloomberg data, Vanguard, Blackrock, and State Street, as passive investment giants, are among the top five holders of MSTR, with QQQ alone holding nearly $1 billion worth of MSTR shares. This holding structure means that if major index compilers (such as MSCI) adjust their rules, it will trigger huge capital flows. This index-based investing means that the volatility of crypto assets is no longer confined to the cryptocurrency market. The market is currently highly focused on whether MSCI will include DATs in its stock indices (the decision is expected to be announced on January 15th). If MSCI decides to retain or include these companies, it will avoid forced selling and boost market expectations for the subsequent inclusion of such companies in the S&P 500; conversely, it could trigger mechanical selling by passive funds.

Surge in Asset Correlation and Backlash from the Wealth Effect

Bitcoin's market capitalization recently plummeted from a high of approximately $2.5 trillion to $1.85 trillion, with the market's "wealth effect" facing headwinds due to the evaporation of $650 billion in wealth.

Peter Tchir observed that with the widespread adoption of spot ETFs, investors can no longer mentally separate crypto assets from their stock holdings. When investors see significant losses in crypto ETFs within their overall stock accounts, panic is more easily spread throughout the entire portfolio, a stark contrast to the mindset of viewing assets in separate cold wallets in the past.

Furthermore, some well-known investors have been surprised to find that certain non-crypto assets they hold exhibit extremely high correlations with Bitcoin. This typically indicates that the same group of investors is facing liquidity pressures—when crypto assets crash, they are forced to sell other highly liquid assets (such as US tech stocks) to raise cash.

This cross-asset class sell-off led to a simultaneous surge in both Nasdaq volatility and the VIX index. Macroeconomic uncertainty and the Fed's dilemma: At the macro level, the Fed's policy path has become unpredictable again. Market expectations for a December rate cut fluctuated wildly from 34% to 63% in just one day. Despite mixed employment data and lingering inflation risks, the end of the "free money" era could slow spending on AI data centers, thus cooling the economy and providing the Fed with a reason to cut rates. Meanwhile, the recent rebound in the 10-year US Treasury yield, a safe-haven asset, and the rise in Japanese government bond yields (the 30-year yield touched 3.3%) also warrant attention, as this could weaken the attractiveness of US Treasuries in the long term. Peter Tchir concludes that the risks facing the economy are greater than ever before. If cryptocurrencies fail to stabilize, the resulting liquidity crunch and wealth loss will not only end the tech stock rally but could also drag down the overall macroeconomic growth. Everyone is holding their breath: Bitcoin's stabilization will be the first signal that the market has confirmed the end of the "painful trading." Goldman Sachs trader Brian Garrett stated, "Many of our clients believe that if Bitcoin trading improves, a year-end rally could re-emerge."