Institutional crypto portfolios are ending 2025 in the red. A new report confirms that digital asset hedge funds are suffering their deepest drawdowns since the Terra-Luna collapse of 2022, battered by a brutal fourth-quarter correction that has wiped out year-to-date gains.
The Q4 Capitulation
The numbers are stark. Bitcoin (BTC) has slid 23% in Q4 alone, struggling to hold the $86,000 support level as of Friday morning. This marks the asset’s worst quarterly performance since Q2 2022, effectively erasing the alpha generated by the “Trump Trade” narrative that dominated early 2025. Volatility has spiked to unmanageable levels for directional funds, with intraday swings exceeding $130 billion across the market.
Liquidity constraints are exacerbating the pain. Unlike the retail-driven sell-offs of previous cycles, this downturn is structural. Market makers are pulling bids ahead of a massive $14 billion options expiry on Deribit on December 27, 2024, leaving funds exposed to severe slippage.
Markets continue to slide as we head into the New Year, with prices sitting on a knife’s edge. Volatility has been intense, triggering a wave of liquidations on both long and short positions.
— Nick Forster, Founder of Derive.xyz
Institutional Fallout
The damage is concentrated in long-biased discretionary funds. While quantitative strategies managed to hedge, funds that levered up on the expectation of a year-end rally have been forced to liquidate positions into a thin order book. The correlation between Bitcoin and major altcoins has tightened to near 1.0, eliminating diversification benefits for multi-token portfolios.
With the $86,000 floor buckling, the market faces a “gamma squeeze” scenario heading into the January 2026 reporting period. Funds are now prioritizing capital preservation over yield, signaling a risk-off environment that could suppress liquidity well into Q1.
