Psychological Shock: Investor Panic Wipes Out $5.5 Trillion as Stocks and Crypto Markets Plunge
A shift in investor sentiment, from extreme greed to extreme fear, has been the main reason behind the historic $5.5 trillion crash in global markets since mid-February, according to the latest analysis by The Kobeissi Letter.
Risk Aversion, Not Tariffs, Led to $5.5 Trillion Crash in Global Markets
Over the past two months, the S&P 500 and the cryptocurrency market have seen a $5.5 trillion loss in value, with the S&P 500 alone losing $4.5 trillion since February 20. The Kobeissi Letter argues that the crash was not due to trade tensions but rather a sudden shift in investor sentiment, which went from record highs to bearishness in a matter of days.
According to Kobeissi’s analysis, market sentiment is the main factor driving prices regardless of fundamentals. The fear and greed index in both the stock and crypto markets has hit its lowest level since 2022.
Swing in investor sentiment triggers historic decline
Despite earlier trade concerns, the market hit new highs in December 2024 and early February 2025. However, the decline began on February 20 as institutional investors cut their exposure to tech stocks. Hedge funds reduced their holdings of the “Magnificent 7” to a 22-month low ahead of the major sell-off, leading to a sharp decline.
Cryptocurrency Market Mirrors Traditional Market Recession
Similar to the stock market, the cryptocurrency market has also lost $1 trillion in value despite supportive policies. On February 9, institutional investors built record short positions in Ethereum, while retail investors poured into the crypto market in anticipation of the US creating a Bitcoin Reserve. However, the event turned into a “sell the news” move, adding pressure to the market.
Massive Outflows Add to Losses
At the end of February, crypto funds saw record outflows of $2.6 billion in a week, while US mid- and small-cap funds lost $3.5 billion and $2.1 billion, respectively. Tech funds also lost $1.9 billion in the same period.
Warning of Rising Volatility
Kobeissi predicted that volatility will increase as the VIX index has increased by 70% in a month. Kobeissi warns that daily swings of 1,000 points in the Dow Jones could become the norm. The analysis concludes that tracking and staying ahead of changes in market sentiment will be a key strategy for investors in 2025.
