Bitcoin is the world’s most traded cryptocurrency and represents the largest part of the crypto market.

It was the first digital coin, first launched in 2009. There are currently 19.99 million coins in circulation with a maximum supply of 21 million coins per bitcoin protocol.

But there are estimates that 2 million to 3 million coins are permanently lost (e.g., password forgotten), so the total supply in circulation may wind closer to 17 million to 18 million.

Just imagine losing access to your Bitcoins — and you feel bad about losing your wallet!

Returns for Bitcoin (BTC) have been, to put it mildly, volatile. Since October, BTC has fallen from an all-time high of $126,272 by more than 40%, testing a theoretical $60,000 price support level.

As of Feb. 16, BTC was down 30% for one year, up 41% for five years, up 16,180% for 10 years, and an all-time eye-popping 620,570%.

But check out the scary downturns along the way.

So, while the current decline may grab your attention, it clearly isn’t something new. Reasons behind the recent fall in BTC include a mix of leverage wash-out, forced selling and a shift in macro-economic sentiment.

Heavy de-leveraging in futures has fallen sharply, suggesting a significant reduction in leveraged (borrowed) long positions.

Reports point to blowups at some Hong Kong-based crypto hedge funds that were forced to unwind big leveraged BTC trades.

And miners have been under pressure from tight financing and capital spending needs that forced them to sell more BTC in an already weak market.

One big name in crypto is Strategy (MSTR), formerly known as MicroStrategy. Led by Michael Saylor, Strategy has made huge bets in crypto with more than 714,000 bitcoins worth almost $50 billion at current prices.

But the company has more than $6 billion in debt and a deep bitcoin downturn would leave the company with tens of billions in paper losses that could strain refinancing options.

If Strategy were forced to liquidate its bitcoin holdings to pay off debt, it could flood the market and drive prices even lower.

Saylor says not to worry, and plans to gradually convert its convertible debt to equity, a move that would dilute existing shareholders.

Investors should never forget about the impact of leverage. History is littered with examples of investors making big bets with borrowed money and getting wiped out when prices fall.

There was no better example than in the 1920s when speculators could buy stock with “10% down.”

Everyone was getting rich as stock markets soared — until the party ended. As stock prices fell, fear grew and investors were increasingly forced to sell to cover margin debt, creating a crash that led to the Great Depression.  

Note: I am not saying the crypto market is the same, but there are centralized exchanges that still offer 50-100 times leverage.

Brett Harrison, former president of FTX, said he believes leveraged trading on volatile crypto markets is “irresponsible” and “becoming a major problem.”

He went on to say that futures have been “extremely successful and useful” in the world of crypto but that trouble begins when exchanges offer large amounts of leverage on highly volatile markets prone to large swings.

Many experts believe the recent downturn in BTC is evidence that Harrison might be right with the market seeing significant de-leveraging since last fall.

At the same time, there are signs traders are again betting on a rebound with borrowed money.

What could go wrong? This is a story you’ll want to keep watching. I sure will.