Bitcoin’s Sharp Decline: Uncovering the Causes Behind the 2025 BTC Collapse

The 2025 crash, which sent BTC tumbling below $100,000, was not the result of a single incident but rather the outcome of multiple systemic weaknesses in decentralized finance (DeFi) combined with a strict Federal Reserve policy. This article explores how the downfall of the Elixir deUSD stablecoin, together with the Fed’s aggressive approach, set off a chain reaction that shifted market sentiment and revealed significant risks within the crypto landscape.

The DeFi Domino: Elixir deUSD's Collapse

The Elixir deUSD stablecoin, which was intended to keep a 1:1 value with the U.S. dollar, collapsed in late 2025 after Stream Finance—a key borrower and liquidity provider—suffered a $93 million loss in trading. Stream had used deUSD as collateral for speculative trades, but as asset values plunged, widespread liquidations depleted Elixir’s reserves, leading to a suspension of redemptions. In just a few hours, deUSD’s price

, shaking trust in stablecoins and causing a $200 million reduction in Total Value Locked (TVL) on Elixir’s platform.

This event exposed the instability of synthetic asset frameworks and the tight interconnections among DeFi protocols. Elixir’s disclosure that Stream held 90% of deUSD’s supply and declined to settle its debts highlighted the dangers of excessive concentration. As one blockchain analyst observed, "

it can trigger widespread panic across the market."

The Fed's Hawkish Pivot: A Macro Tailwind for Volatility

While the weaknesses in DeFi set the

the Federal Reserve’s policy decisions intensified the situation. In the third quarter of 2025, Fed officials such as Cleveland President Beth Hammack stressed that monetary policy was still "barely restrictive," with inflation remaining at 3%—well above the 2% goal. Hammack cautioned that elevated inflation could persist for "two to three years," .

This firm stance, along with delayed economic reports due to a government shutdown, created uncertainty. Banks began to stockpile liquidity, borrowing a record $50.35 billion from the Fed’s Standing Repo Facility in a single day—an indicator of tightening cash conditions. The Fed’s ongoing quantitative tightening (QT) and large Treasury auctions further strained liquidity, increasing volatility in assets like Bitcoin.

The Perfect Storm: Sentiment and Spillovers

The combination of DeFi’s unraveling and the Fed’s policies fueled a cycle of fear. As deUSD lost its peg, Bitcoin’s value

resulting in $1.3 billion in forced liquidations of leveraged positions. The correlation between the Nasdaq-100 and Bitcoin signaling a shift from retail-driven speculation to institutional risk-taking in equities.

Wider economic sentiment deteriorated as companies like Metaplanet saw their Bitcoin holdings fall underwater,

to cover their losses. At the same time, the Fed’s unwillingness to loosen policy—even amid a government shutdown— to only 20%. This prolonged period of tight monetary conditions and uncertainty left Bitcoin vulnerable to both DeFi-specific shocks and broader economic pressures.

Implications for Investors

For those investing, the 2025 crash highlights the importance of caution in two key areas:
1. Managing DeFi Risks: The deUSD failure demonstrates the perils of excessive leverage and unclear collateral arrangements. Investors should focus on platforms with diversified reserves and open governance.
2. Macro Hedging: With the Fed maintaining a tough stance, it’s crucial to reassess risk assets. The growing correlation between Bitcoin and equities suggests it may no longer act as an independent hedge against traditional market swings

.

Conclusion

The 2025 Bitcoin crash was not an isolated incident but rather a reflection of deeper structural problems. The Elixir deUSD debacle revealed weaknesses in DeFi’s design, while the Fed’s strict policies heightened broader economic vulnerabilities. For investors, the takeaway is unmistakable: in today’s interconnected markets, diversification and robust risk controls are essential, not optional.