Bitcoin was a rare asset on the fringes of finance during the Fed’s previous 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 unnerving at best, and all the more so when the market is entering uncharted waters, raising the level of risk for traders considering buying the dip.
Bitcoin touched $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, chief operating officer. from Stack Funds, a cryptocurrency platform based in Singapore.
“The concern is that this time it is different as to whether we will see continued weakening 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.”
The rate hike of the Fed 50 basis points last week It was the oldest in 22 years. Further gains of 50 basis points are expected 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. There’s a big adjustment in investor appetite happening right now,” said Chris Kline, COO and co-founder of Bitcoin IRA in Los Angeles.
Ethereum, the world’s second-largest cryptocurrency, fell to $2,360 on Monday, its lowest since February, and smaller coins, or “altcoins,” have sold off more aggressively.
“The more speculative altcoins are going to struggle, as we’ve seen in previous times of volatility in the crypto space. Bitcoin is seen as risky, but some altcoins are even higher risk and those will see even higher 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?”
What happens in a recession?
It’s not just the cryptocurrency markets that are falling. Equity markets have also tumbled as investors fear 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 WisdomTree digital assets in London.
The Nasdaq and the S&P 500 posted their fifth straight week of declines last week and the Dow Jones its sixth. It was the longest losing streak for the S&P 500 since mid-2011 and for 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.
“From my point of view, two-way price action and occasional sell-offs are healthy for markets, including crypto,” said Brandon Neal, COO of Euler, a project that enables lending and borrowing. crypto assets.
However, he added a caveat. “We have never seen cryptocurrencies in a recession, and nobody knows what will happen.”
