The cryptocurrency has plunged along with other risky assets such as tech stocks after The Fed raised rates last week, putting them on a path expected to top 3% early next year.
Bitcoin was a strange asset on the fringes of finance during the previous Fed tightening cycle, from 2016 to 2019, and was barely correlated to stocks. The last time interest rates hit 3%, in 2008, it was nothing more than a twinkle in Satoshi Nakamoto’s eye.
Cryptocurrency price movements are puzzling at best, and much more when the market is entering uncharted waters, which raises the level of risk for traders considering buying the dip.
Bitcoin hit $29,731 on Tuesday, its lowest level since July 2021.after falling almost 12% last week, its worst weekly loss since January.
“It’s not the first time we’ve hit this level, and the risk-reward ratio for buying bitcoin here has been very good over the last year or so, but we’re looking at a different macro bottom,” said Matt Dibb, COO of Stack Funds, a Singapore-based cryptocurrency platform.
“The concern is that this time around it is different as to whether we will see continued weakened confidence in traditional financial markets, which is likely given the outlook for inflation and the likelihood of rate hikes in the coming months or years,” he added.
The Fed’s rate hike of 50 basis points last week was the biggest in 22 years. They wait new hikes of 50 basis points in June and July, with the possibility of a fourth move in September, according to the CME group’s FedWatch tool.
“The era of easy money is over. A big adjustment in investor appetite is taking place right now”said Chris Kline, COO and co-founder of Bitcoin IRA in Los Angeles.
Ether, the world’s second-largest cryptocurrency, fell to $2,360 on Monday, its lowest since February. and the smaller coins, or “altcoins” have been sold more aggressively.
“The more speculative altcoins are going to struggle, as we’ve seen in previous times of volatility in the cryptocurrency space. Bitcoin is considered risky, but some altcoins are even more risky and those will see even bigger selloffs,” Kline said.
“The question is whether people will see crypto as a diversification tool in bad economies, or is it just something to have when times are good?” he asked.
WHAT HAPPENS IN A RECESSION?
It’s not just the cryptocurrency markets that are falling. Equity markets have also tumbled as investors fear that Global central banks are willing to push economies into recession, if necessary, to curb inflation.
“What’s interesting is that Bitcoin hasn’t fallen as much as the Nasdaq and other asset classes, but the correlation has tightened between them. It’s certainly a higher correlation than we’ve seen in the past,” said Benjamin Dean, director of digital assets at WisdomTree in London.
The Nasdaq and the S&P 500 recorded their fifth consecutive week of declines last week and the Dow Jones its sixth. Was the longest losing streak for the S&P 500 since mid-2011 and the Nasdaq since late 2012.
The correlation of cryptocurrencies with stocks is one of the reasons for their recent sell-off. “We are getting feedback from investors in some family offices who are liquidating crypto because they are liquidating other assets, and they need to offset it on their book for this quarter to show that they are not dying and have some money available to get back into stocks when they bottom out. “said Dibb of Stack Funds.
Some also point out that sales occur periodically in the markets. “In my view, two-way price action and occasional sell-offs are healthy for markets, including crypto,” said Brandon Neal, chief operating officer of Euler, a project that allows you to lend and borrow crypto assets.
However, he added a caveat: “We have never seen cryptocurrencies in a recession, and nobody knows what will happen.”
Source: Ambito
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