Bitcoin investors may face a $1 billion liquidation risk as Bank of America cautions that valuations are likely to decrease.

Bank of America’s recent market outlook resembles less a conventional bearish prediction and more a structural alert regarding the implications when markets cease to command premium multiples, even as profits continue to rise.

The firm contends that the S&P 500 is still “statistically expensive” across 18 out of 20 valuation metrics, with four metrics nearing record highs, and anticipates P/E compression despite projecting a strong 14% growth in earnings.

This scenario of solid fundamentals coinciding with declining multiples presents a classic risk-off dilemma for Bitcoin, which has increasingly behaved like a high-volatility equity beta rather than the diversifier narrative that characterized crypto’s initial institutional appeal.

The underlying mechanics are significant because BofA is not forecasting an earnings collapse.

The firm’s year-end target for the S&P 500 at 7,100 suggests considerable multiple compression even with profits at the upper end of consensus, driven by five specific factors: earnings downgrades following price declines, an influx of IPO supply increasing the equity base, rising asset intensity and leverage within corporate balance sheets, and what BofA refers to as “index risk from private disruptions.”

Software emerges as the focal point of stress, down approximately 20% year-to-date, with valuations at near-decade lows amid concerns regarding AI, a sector BofA specifically identifies as unlikely to recover swiftly.

This is relevant for Bitcoin, as the relationship between crypto and traditional equities has fundamentally evolved since 2020.

CME research indicates correlations between Bitcoin and the Nasdaq reaching between 0.35 and 0.6 during 2025 and early 2026, with crypto consistently magnifying equity movements on downturns.

The “digital gold” diversification narrative has shifted to a reality where Bitcoin acts as liquid beta in multi-asset portfolios, a high-volatility extension of US tech exposure that is sold first when risk appetite diminishes.

Bitcoin’s 20-day rolling correlation with major equity indices indicates near-zero correlation with the S&P 500 and Nasdaq as of late October 2025, while maintaining a strong positive correlation above 0.90 with Ethereum, XRP, and Solana.

Duration math meets cashflow-free assets

When markets require higher risk premiums or real yields increase, long-duration assets are repriced lower.

Bitcoin lacks an earnings stream, dividends, and a terminal value calculation. Nevertheless, it empirically behaves like an asset with extreme duration sensitivity.

This mechanism operates through discount rates: if equities with actual cash flows experience multiple compression due to investors paying less for future growth, an asset with purely speculative cash flows tends to be impacted more severely.

The indicator will manifest in rising real yields and equity volatility occurring simultaneously.

If the March FOMC indicates a slower pace of rate cuts, especially following the February CPI print on Mar. 11, Bitcoin’s implied “duration” will be repriced alongside growth stocks.

BlackRock explicitly framed the trajectory of crypto in 2026 as being influenced “in large part” by liquidity conditions and the pace of cuts, positioning monetary policy as a primary driver rather than a secondary factor.

Cross-asset deleveraging and the liquidity problem

Feb. 5 served as a stress test for how swiftly crypto can become entangled in broader portfolio deleveraging.
Bitcoin liquidations surpassed $1 billion that day, coinciding with a tech selloff and deteriorating risk sentiment linked to institutional crypto ETF outflows.

This incident was not an isolated crypto occurrence; it reflected Bitcoin’s standing in the liquidity hierarchy.

When multi-asset portfolios reduce gross exposure during downturns, managers sell what is liquid and what fluctuates. Bitcoin qualifies on both fronts.

IMF research has documented increasing spillovers and interdependence between crypto and traditional financial assets, particularly during periods of turbulence.

The structural setup indicates that Bitcoin does not decouple during stress. It amplifies the initial risk-off impulse because it is easier to exit than locked-up private positions or illiquid alternatives.

Reuters noted AI-driven borrowing sprees increasing corporate leverage and pressuring coverage ratios, exemplifying the kind of macro feedback loop that exacerbates risk-off cascades.

Greater leverage in the system translates to increased fragility, and Bitcoin occupies a position at the intersection of maximum liquidity and maximum volatility when these cascades occur.

ETF mechanics turn sentiment into daily tape signals

The launch of spot Bitcoin ETFs altered how risk-off sentiment translates into price movements.

What previously manifested as generalized “sentiment” now appears mechanically as slower inflows or outright redemptions, converting institutional positioning into a daily observable signal.

CoinShares reported $1.7 billion in weekly outflows as of early February, with Bitcoin alone accounting for $1.32 billion, a significant reversal that shifted year-to-date flows into net negative territory.

The ETF structure creates a tight feedback loop: equity weakness triggers outflows, which pressure Bitcoin prices, which can activate stop-losses and forced selling in leveraged positions, which in turn lead to further outflows.

This is fundamentally different from the pre-ETF era, when institutional exposure was more challenging to track and slower to adjust. Now, the infrastructure exists for equity-market stress to be transmitted to crypto markets within the same trading session.

Failed rallies become easier to identify. If Bitcoin rebounds on lower volume but ETF flows remain negative or neutral, the rally lacks institutional conviction.

Multi-day redemption patterns coinciding with range-bound or declining prices suggest that the bid will not return until either equity conditions stabilize or macro catalysts shift.

AI narrative contagion and the beta-selling reflex

BofA’s specific identification of software as the worst-performing sector in 2026 carries significance beyond traditional equity analysis.

Software’s approximately 20% year-to-date decline, with valuations at decade lows, reflects increasing skepticism regarding AI capital expenditure returns and the sustainability of winner-takes-all narratives.

If the market transitions from “AI transforms everything” to “AI capital expenditure may be mispriced,” the instinct is not to carefully distinguish between winners and losers, but to sell broad beta exposures.

Bitcoin gets categorized into that beta group despite having no direct AI exposure.

The mechanism operates through narrative contagion: when high-growth, high-multiple sectors falter, risk managers reduce exposure to anything perceived as speculative or momentum-driven.

Reports linked the software selloff directly to Bitcoin and Ethereum weakness on Feb. 5, noting that the decline in the software index “accelerated the slide” in crypto markets.

Nvidia’s earnings call on Feb. 25 serves as the immediate test.

If guidance disappoints or raises concerns about capital expenditure ROI sustainability, the software weakness is likely to deepen, and Bitcoin may face renewed selling pressure as managers exit what they view as correlated risk.

If Nvidia alleviates concerns and stabilizes the AI narrative, Bitcoin could receive a reprieve, but only if flows turn positive and macro conditions align.

Three scenarios, one catalyst window

The base case anticipates an orderly de-rating: mixed earnings, acceptable CPI data, and a cautious Fed in March.

Equities may move sideways or lower as valuations gradually compress. Bitcoin trades erratically with a downside bias, and rallies diminish when ETF flows remain weak, while correlation with equity risk-on/risk-off stays positive but manageable.

Volatility compresses, liquidations remain contained, and the market awaits the next macro catalyst.

The tail risk centers on an AI air pocket: Nvidia’s guidance unsettles the capital expenditure narrative, software follow-through accelerates downward, and equity volatility spikes.

Bitcoin could experience a drawdown larger than that of equities because it is the most liquid, high-beta asset available. ETF outflows may accelerate, liquidations could surge, credit spreads may widen, and forced selling could dominate.

The indicator would be unmistakable: sharp, correlated movements across risk assets with crypto leading the decline.

The upside scenario necessitates macro relief: CPI cools, the Fed signals cuts sooner, and Nvidia reassures markets on AI fundamentals. Equities rebound, and Bitcoin can outperform on reflexive risk-on flows coupled with improving ETF demand.

Correlations increase as inflows return and volatility decreases. That outcome relies on multiple conditions aligning, which is feasible, but not the path of least resistance, given the current positioning.

Scenario	NVDA outcome (Feb 25)	CPI outcome (Mar 11)	FOMC signal (Mar 17–18)	Equity regime (vol + multiples)	BTC impact (direction + volatility)
Base: Orderly de-rating	Beats/inline; guidance steady, but not “blowout” (capex ROI questions linger)	In-line / slightly cooler; no inflation re-acceleration	Cautious hold; reinforces “data-dependent,” cuts not imminent	Valuation leak: gradual P/E compression, rotation, moderately higher vol but contained	Choppy, downside bias; rallies fade on weak risk appetite; vol moderate
Downside: AI air-pocket / risk-off cascade	Miss or shaky guidance; capex intensity questioned; “AI trade” de-rates hard	Hot print / sticky services; pushes out cuts	More hawkish hold; slower/less cutting path	Sharp multiple compression + vol spike; “sell beta” tape, tightening financial conditions	Down hard, amplified vs equities (liquid beta); ETF outflows/liq. risk increases; vol high
Upside: Macro relief + AI reassurance	Strong beat; guidance de-risks AI demand + capex ROI	Cooler-than-expected; disinflation narrative strengthens	Dovish hold / signals earlier cuts (or faster pace)	Risk-on rebound; vol falls; multiples stabilize or re-rate modestly	Up, can outperform on reflexive risk-on + improving flows; vol falls but remains elevated vs equities

The immediate test arrives within weeks

Feb. 25 brings Nvidia’s earnings call. Mar. 11 delivers the February CPI print. March 17-18 frames the next FOMC decision.

These three events will determine whether BofA’s P/E compression thesis unfolds swiftly or is postponed by better-than-expected data.

For Bitcoin, the stakes are clear: if equities reprice from “priced for perfection” to “pay less for risk,” crypto will be sold as liquid beta through deleveraging, tighter liquidity, and ETF mechanics before any serious decoupling discussion begins.

BofA maintains its year-end S&P 500 target of 7,100 and cautions that a rapid rebound appears unlikely.

If this perspective proves correct, Bitcoin will encounter a structural headwind that is largely unrelated to crypto-specific fundamentals and primarily linked to its role as a high-volatility equity beta in an environment where markets cease to pay premium multiples.

The catalyst window is immediate, the transmission channels are well established, and the ETF infrastructure ensures feedback loops operate more swiftly than in prior cycles.

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