It was short-lived – the excitement that followed Bitcoin’s all-time-high in November. The cryptocurrency’s Bull Run that saw bitcoin came close to $70,000 ended prematurely and ushered in a down-spiraling market trend that has ignited mourning among investors.
Bitcoin dropped below $36,000 on Saturday, with altcoins also lowering their gains to more than half, the lowest since July. The recent market plunge affecting riskier assets is attributed to the Federal Reserve intending to withdraw stimulus from the market.
Bitcoin touched $68,000 in November, but has lost over 45% of its value since then. Bespoke Investment Group said the decline, which has wiped off $600 billion in bitcoin’s market value, and over $1 trillion in the aggregate crypto market value, is the second-largest ever decline in dollar terms for both.
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“It gives an idea of the scale of value destruction that percentage declines can mask,” wrote Bespoke analysts in a note. “Crypto is, of course, vulnerable to these sorts of selloffs given its naturally higher volatility historically, but given how large market caps have gotten, the volatility is worth thinking about both in raw dollar terms as well as in percentage terms.”
Bloomberg pointed out the impact of Fed’s moves on both stocks and cryptocurrencies, marking striking correlation.
With the Fed’s intentions rocking both cryptocurrencies and stocks, a dominant theme has emerged in the digital-asset space: cryptos have twisted and turned in nearly exactly the same way as equities have.
“Crypto is reacting to the same kind of dynamics that are weighing on risk-assets globally,” said Stephane Ouellette, chief executive and co-founder of institutional crypto-platform FRNT Financial. “Unfortunately for some of the mature projects like BTC, there is so much cross-correlation within the crypto asset class it’s almost a certainty that it falls, at least temporarily, in a broader alt-coin valuation contraction.”
Crypto-centric stocks also dropped on Friday, with Coinbase Global Inc. at one point losing nearly 16% and falling to its lowest level since its public debut in the spring of 2021, Bloomberg data show.
MicroStrategy Inc. tumbled 18% while the Securities and Exchange Commission said the company can’t strip out Bitcoin’s wild swings from the unofficial accounting measures it touts to investors. The enterprise software company’s pile of Bitcoin has effectively made its shares a proxy for the digital asset.
Meanwhile, the Biden administration is preparing to release an initial government-wide strategy for digital assets as soon as next month and task federal agencies with assessing the risks and opportunities that they pose, according to people familiar with the matter.
Antoni Trenchev, Nexo co-founder and managing partner, cites Bitcoin’s correlation to the tech-heavy Nasdaq 100, which right now is near the highest in a decade.
“Bitcoin is being battered by a wave of risk-off sentiment. For further cues, keep an eye on traditional markets,” he said. “Fear and unease among investors is palpable.”
Take also the correlation between Bitcoin and Cathie Wood’s ARK Innovation ETF (ticker ARKK), a pandemic poster-child of speculative risk-taking. That correlation stands at around 60% year-to-date, versus about 14% for the price of gold, according to Katie Stockton, founder and managing partner of Fairlead Strategies, a research firm focused on technical analysis. It’s “reminding us to categorize Bitcoin and altcoins as risk assets rather than safe havens,” she said.
Meanwhile, more than 239,000 traders had their positions closed over the past 24 hours, with liquidations totaling roughly $874 million, according to data from Coinglass, a cryptocurrency futures trading and information platform.
Though liquidations have spiked, the numbers are relatively muted when compared to previous declines, according to Noelle Acheson, head of market insights at Genesis Global Trading. Acheson points out that Bitcoin’s one-week skew, which compares the cost of bearish options to bullish ones, spiked to almost 15% on Wednesday compared to an average of about 6% in the past seven days.
“This flagged a jump in bearish sentiment, in line with overall market jitters given the current macro uncertainty,” she said.
Kara Murphy, chief investment officer at Kestra Investment Management, said cryptocurrencies have a life of their own but that the recent slump is rational.
“It makes sense as people start to retrench a little bit, look for something that’s a little bit more solid, they’re gonna move away from crypto,” she said. “On the margin, with folks becoming more risk averse, crypto will suffer from that.”