Cryptocurrency prices are tracking equities never seen before, penalizing investors who acquired bitcoin and some other digital products to diversify their portfolios.
As per Dow Jones Market Data, the three-month connection between the cryptocurrency bitcoin and Ethereum and the major U.S. stock indexes reached its highest point in history last week. Between 0.67 and 0.78, the average correlation between crypto and the S&P 500 from 2019 to 2021 has over tripled. A value of 1 indicates that the markets are rising in lockstep, whereas a correlation of 0 indicates that they are not. The one-month and two-month correlations have reached new highs.
Bitcoin sank 10% on the day of the historic correlation, while the Nasdaq Composite Index dropped over 4%, marking the biggest three-day point decrease on record. While bitcoin and other virtual currencies have always been regarded as among the toughest capital markets, experts and investment advisors say the severity of crypto falls this year, and their proclivity to mirror other riskier assets like stocks could limit popular adoption.
Crypto has "become part of the general monetary sector, which isn't helpful for its survival as a different asset class," according to Richard Craib, a quant investment banker in San Francisco.
As investors attempt to manage the massive swings rocking financial markets throughout the world, stocks, bonds, and cryptocurrency have all fallen. Caitlin McCabe of the Wall Street Journal examines some of the factors that have contributed to the latest market mania. courtesy of Getty Images/Spencer Platt
Mr. Craib sold his entire stake of ether, $2.5 million, last week, partially because ether has now been moving even more like stocks and bonds. He purchased the cryptocurrency for the first time in 2014.
For years, supporters of bitcoin, ether, and other cryptocurrencies maintained that they might be used as "additional" assets to help balance portfolio declines or at the very least soften any stock and bond dips. These and other justifications helped convince more fund managers and other sophisticated investors to include bitcoin and ether in their investments.
Bitcoin has been purchased by large funds like Cathie Wood's ARK Investment Management LLC and corporations like Elon Musk's Tesla Inc. and Michael Saylor's MicroStrategy Inc., allowing financial markets to get more connected with crypto marketplaces.
Moreover, during the last year or two, crypto-related organizations like Coinbase Global Inc. have decided to go public, further connecting digital trading marketplaces with equities and bonds. But the market crash of 2022, which has hit almost everyone except commodities whose value has risen during a period of rising inflation, has turned that theory on its own head.
Another reason markets are swinging in lockstep, according to traders and economists, is that more and more traditional traders have incorporated digital currencies into their holdings. Some investors have started selling crypto to raise cash as their stock and bond assets have struggled in the latest market turmoil. Simultaneously time, falling stock and bond prices have dampened many investors' enthusiasm for cryptocurrency.
Bitcoin is still hovering around $30,000. How Should Investors Respond?
As the cryptocurrencies and stock markets battle to find upward momentum, Bitcoin's price remained barely under $30,000 on Monday. Over the last week, the most popular cryptocurrency has lost roughly 10% of its value. Bitcoin last rose over $40,000 on May 4 when the Federal Reserve stated it will battle inflation without raising interest rates, but the benefits were short-lived. For a few weeks, Bitcoin was already trading in a narrow range, generally within $26,000 and $31,000.
"We just received confirmation that Bitcoin finished above $30,000," cryptocurrency specialist Wendy O remarked in a TikTok analysis of the market on May 15. "In this week, I believe it will settle between $34,000 and $24,000," says the trader. Higher inflation, geopolitical events, and concerns about the Fed's tightening monetary policy have all contributed to heightened market volatility. Last May 4, the Fed raised interest rates for the first time in 22 years to fight inflation, which dropped to 8.3% in April as per the most recent inflation report.
Experts say the crypto market has been mirroring the stock market recently, which, when coupled with more widespread use and the recent price slumps, makes it even more linked with macroeconomic concerns. Ethereum has joined the movement of Bitcoin. Some experts feel that TerraUSD (UST), one of the most popular stable coins, contributed to Bitcoin's recent meltdown. UST was supposed to be linked to the dollar, but it plummeted to as short as 12 cents before collapsing in a pseudo-bank run as anxious investors rushed off their tokens. The Terra blockchain has now been not in use.
Since December 25, 2021, Bitcoin has not yet gone above $50,000. Apart from the ups and downs, Bitcoin has remained over $34,000, the biggest drop in the preceding six months. Bitcoin has lost 40% of its value after hitting an all-time high of around $68,000 on November 10, 2021, owing to rising inflation, a sluggish employment market, and the Fed's continuous signs that it will begin winding down aggressive measures to boost the economy.
In the last week, Bitcoin has traded between $26,000 and $34,000. This is how Bitcoin's current cost compared to its recent daily high:
- On Feb 16 - $40,538
- On April 16 - $39,716
- On May 9 - $ 31,022
What's Causing Bitcoin's Recent Drop?
Many investors consider price fluctuations in Bitcoin to be part of the sport, but "volatility is difficult for shareholders to deal with," according to Noble. He, as well, warns about selling too soon.
Soaring inflation, persistent uncertainty over the country's continuing struggle with COVID-19, and current regulations move by the US government, particularly Biden's recent executive order, have all contributed to recent price fluctuations. It doesn't take much to cause crypto price movements in a new and unproven market like cryptocurrencies. According to research by Glassnode Insights, a blockchain analysis company, new short-term traders who are trading their holdings in response to the latest decrease may be adding to the reduction in Bitcoin's value.