For many years, cryptocurrencies have been relatively immune to the movements of traditional stock, bond, and commodity markets thanks to the relative size of the markets.
Over time, the theory emerged that bitcoin would be a handy inflation hedge, thanks to its 21 million supply cap that creates a shortage as demand increases.
But bitcoin is now more correlated to the Nasdaq than at any time since 2010, according to data from Bloomberg, and that index is feeling the fallout from rising prices and interest rates.
Billionaire Sam Bankman-Fried, founder of cryptocurrency exchange FTX, says the correlation is likely to continue as the macroeconomic situation dominates investor sentiment.
“Crypto markets have mostly stabilized, modulo everything in traditional markets,” Bankman-Fried said. Fortune on weekends, referring to a mathematical operation called “modulo” that illustrates the relationship between two numbers.
“So if stocks recover, I would expect the same in crypto. If stocks continue to slump, BTC could do the same.
worst case scenario
The threat of a recession in the United States has stock market investors preparing for a prolonged period of volatility.
As it stands, they’re digesting a global macro picture that includes U.S. policy rate hikes, supply chain issues, chip shortages, soaring oil prices and rising inflation. rapidly in developed economies.
“The holy grail for crypto bulls is the day crypto decouples from a falling stock market,” said Brent Donnelly, president of foreign exchange publication Spectra Markets.
“On the other hand, the near-term worst-case scenario is that the Nasdaq finds a base and the crypto continues to decline.”
Over the past 10 years, there have been two main crashes that have resulted in what are known as “crypto winters”.
The first was in 2014, when bitcoin fell from its peak of US$1,137 to US$183 – an 84% plunge – thanks in part to the collapse of Mt Gox, a widely used exchange.
The second was in late 2017, when initial coin offerings — an unregulated way to raise capital to build a crypto project — caused hundreds of millions of dollars to flow into bitcoin. The exuberance pushed the price of bitcoin to a high of US$19,650 before crashing through 2018 to a low of US$3,181.
Last week, the collapse of the third most widely used stablecoin, terraUSD, caused a dramatic revaluation of crypto prices and marked the start of a period when the technical risks inherent in crypto investments are more taken into account. .
But Michael Gronager, co-founder and CEO of the world’s largest crypto data analysis company, Chainalysis, says these downtimes are useful for distinguishing between signal and noise.
“It’s during these bear markets that good new technology is being developed,” Gronager said.
“We’ve seen people get excited about new technology and suddenly everyone wants access to it, but it’s never as good as hoped. And then there’s some disappointment, but it’s when a bear market hits and companies are underfunded that real innovation emerges.