Wall Street’s traders are pointing fingers at Bitcoin for a baffling market reversal this week. After Nvidia’s blockbuster earnings sparked hopes of an AI-fueled rally, stocks plunged in a head-spinning turn. The S&P 500 dropped over 2% on Thursday, erasing early gains, while Bitcoin’s rout deepened, falling below $84,000 from recent highs above $100,000. Investors suspect leveraged bets on crypto are forcing sales across asset classes.

“It’s possible that the rout in bitcoin is forcing some investors to sell stocks that they own,” said a market strategist, as reported by Fortune. This theory gained traction amid a crypto market wipeout that saw nearly $1 trillion in value evaporate, triggering margin calls on overleveraged positions.

Bitcoin ETF inflows, once a steady pillar of demand, have reversed sharply. Wall Street’s crypto engines are stalling, with funds shedding millions daily, according to Bloomberg. This liquidity crunch is rippling into equities, where hedge funds and family offices with cross-asset exposure face forced liquidations.

Bitcoin’s Plunge Ignites Leverage Cascade

The crypto selloff began in earnest last month, with Bitcoin shedding 30% from its October peak near $126,000. Open interest surged to record levels, signaling rampant leverage, before a brutal retrace wiped out $1.2 trillion in market cap, as noted in posts found on X. Liquidations exceeded $1 billion in a single session, per on-chain data trackers.

Traders who parlayed stock portfolios into crypto leverage are now under pressure. “The BTC selloff causing systemic margin calls in equity portfolios. Where do you think they got the leverage from?” one X user remarked, echoing sentiment among industry insiders. Prime brokers at firms like Goldman Sachs and Morgan Stanley, which facilitate cross-margin trading, are reportedly scrambling to cover exposures.

Market depth for Bitcoin and Ether remains structurally thin post-October’s leverage purge, risking sharper swings, warns CoinDesk. This fragility amplified Thursday’s reversal: Nvidia shares jumped 8% pre-market on earnings, only to close down 7% as crypto contagion spread.

Wall Street’s Crypto Stress Test Unfolds

Crypto’s brutal month is testing Wall Street’s plumbing. Reversals are familiar to Bitcoin holders, but the scale this time—paired with ETF outflows—marks a structural shift. Bloomberg reports that Bitcoin ETFs, which amassed billions in inflows earlier this year, are now net sellers, stoking fears of further downside.

Hedge funds with algorithmic strategies linking equities and crypto are hit hardest. A classic fakeout unfolded: open interest ballooned 7.2% in 24 hours on leveraged longs, then imploded, as detailed in X discussions. Nasdaq’s 4% intraday drop mirrored Bitcoin’s slide below $83,000, with AI stocks like Nvidia caught in the downdraft.

Fed policy adds fuel. Despite soft data hinting at December rate cuts, hawkish signals triggered risk-off moves. Crypto market cap plummeted 9% to $2.82 trillion, nearing April lows, with $2.4 trillion as the next support, per FXStreet.

Cross-Asset Contagion Mechanics Exposed

Prime brokerage arms enable seamless leverage across stocks and crypto, but in downturns, this becomes a liability. Investors borrowing against equity collateral for Bitcoin bets face triple-digit margin calls when prices crater. Business Insider explains: Thursday’s stock reversal followed a stellar rally, but crypto selling pressure overwhelmed bids.

Publicly traded crypto firms like MicroStrategy and Coinbase saw shares crater 10-15%, dragging indices lower. “Crypto Winter 2.0 Hits Wall Street,” proclaimed one X post, capturing the panic as Bitcoin tested $84,000. Volatility isn’t normalizing; it’s a liquidity black hole.

Regulators are watching. The SEC’s crypto oversight intensifies amid ETF reversals, while CFTC probes leverage excesses. Yet, for now, markets steady Friday on rate-cut hopes, per The Times of India, but underlying fragilities persist.

Liquidity Crunch Echoes Past Crises

This isn’t isolated. October’s $1 billion liquidation cascade retraced gains, with stocks selling off post-NY open. Similar dynamics played out in prior dumps: 1.4 million traders liquidated in hours, S&P down 2%, Bitcoin to $102,000, as shared on X. Altcoins bled 60-90%.

Institutional fingerprints are everywhere. Family offices and endowments, lured by 2024’s crypto boom, overextended. Short squeezes in crypto-tied equities compounded the rout. CNN Business notes bouts of volatility signal more turbulence ahead, with Bitcoin and stocks synchronized in pain.

Recovery hinges on liquidity restoration. Bitcoin ETF flows must stabilize, leverage must delever, and Fed cuts materialize. Until then, Wall Street’s crypto bettors tread carefully, aware one margin call can topple portfolios.

Outlook: Fragile Rebound or Deeper Rout?

Friday’s steadiness belies risks. AI stocks remain volatile, Bitcoin lurks near key supports. If $2.4 trillion crypto cap breaches, expect escalated equity selling. Traders eye December FOMC for relief, but structural liquidity holes—thinner market depth, reversed ETF flows—portend swings.

Posts on X warn this isn’t the bottom; margin calls continue. Bloomberg’s stress test narrative underscores: euphoria to brutal selloff in weeks. For industry insiders, the lesson is clear—crypto’s tentacles now reach deep into traditional markets, turning isolated routs into systemic events.