With stablecoins gaining prominence and prediction markets encroaching on its market share, is Bitcoin facing identity anxiety?

Author: Zhao Ying, Wall Street Insights

Bitcoin is facing an unprecedented identity crisis. The world's largest cryptocurrency has plummeted over 40% from its peak, but the real problem isn't the price itself, but rather the simultaneous collapse of the core narrative supporting its value. When "digital gold" loses to real gold, its payment function loses to stablecoins, and its speculative fervor loses to prediction markets, Bitcoin is forced to confront a question it has never needed to answer before: Why does it exist?

Ironically, this crisis occurred after Bitcoin had achieved everything it wanted. Washington's regulatory stance had never been more welcoming, institutional adoption more profound, and Wall Street more accepting. But these victories failed to prevent a market capitalization loss of over $1 trillion. The conventional rally script had failed—bargain hunters had vanished, and the forces that usually drive rallies were now operating in the opposite direction.

According to a Bloomberg report on Saturday, unlike stocks or commodities, Bitcoin lacks fundamental support, and its value relies almost entirely on belief—on narratives that persuade new buyers to enter the market. And these narratives are faltering. Retail investors who bought in during the Trump-driven rally are now deeply trapped. More importantly, Bitcoin now has to compete with more alternatives that are “easier to understand and easier to explain to trustees, clients, and boards.”

Owen Lamont, portfolio manager at Acadian Asset Management, stated:

The complete defeat in the payment battlefield

A clear signal came last November. Jack Dorsey, one of Bitcoin's most outspoken corporate evangelists, announced that his Cash App would begin supporting stablecoins. For years, Dorsey had championed Bitcoin minimalism, and his shift signaled that the payments race had moved.

In Washington, stablecoins have become a focal point. The bipartisan Genius Act passed easily, and regulators openly encourage dollar-backed token infrastructure. Even within the cryptocurrency space, Bitcoin is no longer the sole focus. Tokenization, blockchain-driven derivatives, and cross-border stablecoin payments are emerging as credible use cases—none of which require Bitcoin.

"If there's any connection, stablecoin activity is probably related to activity on Ethereum or other chains. Stablecoins are used for payments," said Carlos Domingo, co-founder and CEO of the tokenization platform Securitize. "I don't think anyone today sees Bitcoin as a payment mechanism."

The bankruptcy of the "digital gold" narrative

Even after years of hype surrounding "digital gold," Bitcoin has failed the most important macroeconomic test. Despite geopolitical tensions and a persistently weak dollar, gold and silver have seen volatile rallies this year, while cryptocurrencies have simply declined. Fund flows confirm this divergence. According to data compiled by Bloomberg, US-listed gold and gold-themed ETFs attracted over $16 billion in the past three months, while spot Bitcoin ETFs saw outflows of approximately $3.3 billion. Bitcoin's market capitalization has shrunk by over $1 trillion.

" People are realizing that Bitcoin is just what it has always been—a speculative asset ," said Tom Essaye, president and founder of Sevens Report and a former Merrill Lynch trader. "Bitcoin won't replace gold; it's not digital gold, it doesn't do the same thing, and it can't provide the utility that gold offers. It's not an inflation hedge—frankly, there are other, better hedges where you don't have to worry about volatility. It's not a chaos hedge either."

The digital asset treasury model was supposed to be Bitcoin's corporate identity. Companies like Strategy Inc. accumulated Bitcoin during the bull market and issued shares based on it, creating a self-reinforcing cycle that generated billions of dollars in market capitalization out of thin air and provided institutional investors with a way to express their conviction without directly handling the assets. This worked for a time. But now the cycle has reversed—and with it, the credibility of the model has collapsed. The largest digital asset treasury companies have plummeted over the past year—some by far more than Bitcoin itself. Many of these companies are now trading below the value of the assets they hold.

Speculative frenzy shifts to prediction markets

Bitcoin's grip on speculative culture is also slipping. Prediction platforms like Polymarket and Kalshi—featuring binary outcomes, fast settlement, and real-world stakes—are now becoming the new playground for dopamine hunters who once chased meme coins. This isn't an isolated phenomenon: Polymarket's weekly nominal trading volume has surged over the past year. Even Coinbase Global Inc. has added prediction contracts. Dopamine hasn't disappeared; it's just shifted its focus.

"Prediction markets are becoming the next hotbed for DIY investors who enjoy the speculative nature of cryptocurrencies," said Roxanna Islam, head of industry research at ETF firm TMX VettaFi. "This could mean a decline in overall interest in cryptocurrencies." However, she added, "It could also mean a shift towards more long-term, more serious investors."

Furthermore, there is a growing mismatch between how Bitcoin is accessed and how it is traded. While spot ETFs make buying incredibly easy, Bitcoin prices are still influenced by offshore derivatives markets, where traders often use leverage of up to 100x. These venues employ automated liquidation engines: when a position exceeds its margin threshold, it is forcibly liquidated and sold into the order book, instantly triggering a chain reaction of liquidations that can cause the spot price to collapse within minutes. The crash of last October vividly exposed this mechanism, with billions of dollars in leveraged positions being liquidated in an instant.

The dividing line between resilience and correlation

All of this doesn't mean Bitcoin is finished. It remains the most liquid digital asset, boasting a deeper order book and broader exchange coverage than any of its competitors. Spot ETFs have made Bitcoin a permanent fixed asset in portfolios. More importantly, it has weathered existential crises: the Mt. Gox crash, the 2022 crash—and many others. Each time, the network survived, and the price began to hit new records. This resilience is not without merit.

"There will always be people spreading fear, uncertainty, and doubt. There will always be questions," said Dan Morehead, founder of Pantera Capital. "I just think that people who are skeptical about how important mobile-based currencies are to the world naturally want to find new things to worry about."

The bullish rationale isn't based on a flawless narrative for Bitcoin, but rather on the fact that it doesn't need to be—it simply needs to be persistent enough to weather every successive crisis of confidence. So far, history has been on their side. According to Bloomberg data, Bitcoin has recovered after numerous previous large-scale declines.

But history also shows that survival and relevance are not the same. Bitcoin's biggest threat is not competitors—but drift. When no single narrative can sustain it, a slow loss of attention, capital, and belief ensues. The asset still exists, the network still operates, but the stories that give Bitcoin its allure—digital gold, free money, institutional reserves—are simultaneously crumbling. Whether this is a temporary crisis or a permanent shift is one of the biggest questions of the digital economy era.

"For many people, it's like a religion, and religious beliefs are hard to shake," said Michael Rosen, chief investment officer at Angeles Investment Advisors. "It's just that it's not my religion."