Bitcoin's Demand Cycle and the Onset of a Shallow Bear Market: Early Signals and Downside Risks for Investors

The cryptocurrency market has long been characterized by cyclical patterns, with Bitcoin (BTC) serving as both a bellwether and a barometer for broader sentiment. As of late 2025, a confluence of on-chain metrics, derivatives data, and macroeconomic shifts suggests that Bitcoin's demand cycle is entering a bearish phase. While the market has not yet experienced a full-blown bear market, early signals point to a "shallow" correction-a decline of roughly 55% from recent highs-rather than the steep, prolonged downturns seen in 2018 or 2022. For investors, understanding these signals is critical to navigating the risks ahead.

Early Signals of a Bear Market

1. On-Chain Demand Exhaustion
Bitcoin's demand growth has slowed sharply since early October 2025, falling below its long-term trendline and signaling a reversal in institutional and large-holder buying activity. On-chain analytics firm CryptoQuant highlights that three major demand drivers-U.S. spot Bitcoin ETFs, optimism around the U.S. presidential election outcome, and interest from Bitcoin Treasury Companies-have been largely priced in, leaving the market without a key pillar of support.

Further, on-chain metrics such as the Bull Score Index and MVRV Z-score have turned consistently bearish since mid-2025, indicating that retail and institutional investors are increasingly adopting a risk-off stance. These metrics, which measure the ratio of profitable to unprofitable coins and overall market sentiment, often precede bear market confirmations by months.

2. Derivatives Market Weakness
Derivatives data reinforces the bearish narrative. Funding rates for Bitcoin's perpetual futures contracts have fallen to multi-year lows, reflecting reduced leverage and risk appetite among traders. This is a hallmark of bear markets, where speculative activity wanes and liquidations become more frequent.

Additionally, open interest-a measure of the total number of outstanding derivative contracts-plummeted by $19 billion in late October 2025 amid renewed U.S.-China trade war fears. This decline coincided with Bitcoin's price correction from an all-time high of $126,080 to around $87,000, a move consistent with historical bear market patterns.

3. Price Structure and Moving Averages
Bitcoin's recent breakdown below its 365-day moving average-a key long-term indicator-has further cemented the bearish outlook. This technical level has historically separated bull and bear conditions, with breaches often preceding extended downturns. Analysts note that the current price action mirrors the 2022 bear market, albeit with a less severe trajectory.

Cycle Inversion: A New Paradigm?

The traditional four-year halving-driven Bitcoin cycle appears to be losing relevance. Instead, macroeconomic forces-such as Federal Reserve liquidity and institutional demand are now the dominant drivers. This "cycle inversion" suggests that Bitcoin's future will be more closely tied to global financial sentiment and regulatory developments than to its own supply mechanics.

For example, Bitcoin's dominance over altcoins has surged to multi-year highs, while ETF outflows indicate a shift in capital toward safer assets. This divergence from historical patterns underscores the growing influence of institutional investors and macroeconomic factors, which may limit Bitcoin's downside but also reduce its upside potential in the near term.

Downside Risks and Potential Bottom

While the bearish signals are compelling, the magnitude of the correction remains a key question. Current on-chain data suggests a "shallow" bear market, with Bitcoin's realized price-a metric that averages the price at which coins have been last moved-hovering near $56,000. This level could act as a psychological and technical support, limiting further declines to a drawdown of roughly 55% from the October 2025 peak.

However, risks remain. A prolonged trade war between the U.S. and China, regulatory crackdowns on crypto infrastructure, or a sharper-than-expected tightening of monetary policy could exacerbate the downturn. Investors should also monitor Bitcoin's dominance metrics and ETF flows for signs of capitulation or stabilization.

Conclusion

Bitcoin's demand cycle is undeniably shifting into bearish territory, supported by a combination of on-chain exhaustion, derivatives weakness, and macroeconomic headwinds. While the market may avoid the worst-case scenarios of previous bear cycles, investors must remain cautious. Position sizing, hedging strategies, and a focus on liquid, high-liquidity assets will be critical in navigating the coming months. As the adage goes, "Bull markets are for buying, bear markets are for balancing." For now, balancing seems prudent.