Recently, there’s been only one constant for Bitcoin: decline after decline after decline. And the superlatives have been piling up fast. Riskier assets around the world have suffered as the Federal Reserve prepares to remove stimulus from the market. Bitcoin, the most valuable digital asset, fell more than 12% on Friday, falling below $36,000 for the first time since July. It has lost over 45 percent of its value since its peak in November. Other digital currencies, such as Ether and meme coins, have suffered just as much, if not more, losses.
Since that November high, Bitcoin has lost more than $600 billion in market value, and the total crypto market has lost more than $1 trillion. According to Bespoke Investment Group, this is the second-largest ever decline in dollar terms for both Bitcoin and the aggregate market, despite much larger percentage declines.
In a note, Bespoke analysts wrote, “It gives an idea of the scale of value destruction that percentage declines can mask.” “Crypto is, of course, vulnerable to these types of selloffs due to its historically higher volatility, but given how large market caps have gotten, volatility is worth thinking about both in raw dollar terms and in percentage terms.”
With the Fed’s intentions rocking both cryptocurrencies and stocks, a recurring theme in the digital-asset space has emerged: cryptos have twisted and turned almost identically to equities.
“Crypto is reacting to the same kinds of dynamics that are weighing on risk assets around the world,” said Stephane Ouellette, CEO and co-founder of FRNT Financial, an institutional crypto-platform. “Unfortunately for some of the more established projects, such as BTC, there is so much cross-correlation within the crypto asset class that it’s almost a certainty that it will fall, at least temporarily, in a broader alt-coin valuation contraction.”
Crypto-related stocks also fell on Friday, with Coinbase Global Inc. losing nearly 16 percent at one point and falling to its lowest level since going public in the spring of 2021, according to Bloomberg data.
MicroStrategy Inc. fell 18 percent after the Securities and Exchange Commission stated that the company’s unofficial accounting measures cannot account for Bitcoin’s wild swings. The enterprise software company’s Bitcoin holdings have effectively turned its stock into a Bitcoin proxy.
According to people familiar with the situation, the Biden administration is planning to release an initial government-wide strategy for digital assets as soon as next month, tasked federal agencies with assessing the risks and opportunities they present.
Bitcoin’s correlation to the tech-heavy Nasdaq 100, which is currently near its highest in a decade, according to Antoni Trenchev, Nexo co-founder and managing partner.
“A wave of risk-off sentiment is battering Bitcoin. Keep an eye on traditional markets for more clues,” he advised. “There is a palpable sense of fear and unease among investors.”
Consider the link between Bitcoin and Cathie Wood’s ARK Innovation ETF (ticker ARKK), the poster child for speculative risk-taking. According to Katie Stockton, founder and managing partner of Fairlead Strategies, a research firm focused on technical analysis, the correlation is around 60% year-to-date, compared to about 14% for the price of gold. She explained that it’s “reminding us to classify Bitcoin and altcoins as risk assets rather than safe havens.”
According to data from Coinglass, a cryptocurrency futures trading and information platform, over 239,000 traders had their positions closed in the last 24 hours, with liquidations totaling $874 million.
According to Noelle Acheson, head of market insights at Genesis Global Trading, while liquidations have increased, the numbers are relatively low when compared to previous declines. Bitcoin’s one-week skew, which compares the cost of bearish options to bullish options, spiked to nearly 15% on Wednesday, compared to an average of about 6% in the previous seven days, according to Acheson.
“This signalled a shift in bearish sentiment, which is consistent with overall market jitters given the current macro uncertainty,” she explained.
Cryptocurrencies have a life of their own, according to Kara Murphy, chief investment officer at Kestra Investment Management, but the recent slump is rational.
“It makes sense that as people start to retrench a little bit and look for something more solid, they’ll move away from crypto,” she said. “On the margin, as people become more risk averse, cryptocurrency will suffer.”
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