Crypto markets increasingly act like speculative assets, like tech stocks, commodity futures, and anything related to rapid economic growth and excess liquidity.
Bitcoin and other cryptocurrencies were tumbling on Monday, falling in tandem with stocks that were under pressure due to a string of bad news over the weekend.
Bitcoin fell 2.5% to $46,100 while Ether, the native token of the Ethereum network, fell 3% to $3,800. the
Nasdaq Composite Index
was down 1.4%.
The positive crypto narrative is getting murkier with the rapidly spreading Omicron variant and central banks bracing the market for tighter monetary policies and interest rates in 2022. Another blow came on Sunday as Senator Joe Manchin (DW. Virginia) said he wouldn’t. support the Democrats’ Build Back Better legislation, effectively killing the $1.7 trillion package for now.
The tougher outlook is causing Wall Street to cut its estimates for U.S. economic growth, with Goldman Sachs cutting its forecast for first-quarter gross domestic product growth to 2% from 3%, and lowering the outlook for subsequent quarters.
The correlation between loose monetary policy and rising crypto prices hinges on the idea that investors would rather take their chances on a risky asset like Bitcoin than keep money in the bank, earning zero percent. Yet, as the “risk-free” rate rises, the opportunity cost of speculation also rises.
Perhaps more than the calculations behind this compromise, it is the feeling that 2022 will not be the takeoff of the global economy that was expected before the Omicron variant, soaring inflation and a political stalemate in Washington, the Democrats being unable to move the measures forward would have been largely stimulating.
Also, if Bitcoin is really “digital gold”, acting as a store of value and a hedge against the depreciation of “fiat” currencies, it doesn’t act that way. The crypto peaked on Nov. 10 at $68,789, according to CoinMarketCap, and it has been sliding ever since, despite higher inflation readings and prospects for three interest rate hikes in 2022 to combat the tide. ‘inflation.
Other cryptos have also fallen into bear markets, despite having very different uses and applications from Bitcoin. Among them are “smart contracts” and non-fungible tokens, or NFTs, on the Ethereum network, using the Ether token as currency. Other cryptos are used for international money transfers, supply chain management, gaming, and cross-transfers of digital assets or data between different blockchains.
Yet few were spared from the massive sale. Solana, the fifth-largest crypto by value with a market capitalization of $88 billion, hit a high of $259 on November 6. It is now around $182. Avalanche, another major token, worth $26 billion, is at $107, down from highs of around $134.
Some of the declines may reflect profit taking after a surge in many cryptos earlier in the year. And not a day goes by without venture capital investing in space; The new venture capital funds raised $150 million last week with a “focus on web 3.0 gaming and blockchain,” according to Fundstrat Global Advisors.
On a much larger scale, NYDIG, the major crypto custodian, asset manager, and institutional trading firm, recently racked up an additional $1 billion in funding, valuing it at $7 billion. One reason is that NYDIG could help bring Bitcoin to the masses through a partnership with
National cash register
(ticker: NCR), a global ATM company with more than 15,000 banks and credit unions on its network.
“The partnership is expected to bring Bitcoin to over 650 banks and credit unions, or approximately 24 million new consumers,” says Fundstrat.
Yet, as the macroeconomic climate hardens, fewer and fewer large-scale investors or individuals may be willing to speculate on the steadily rising prices of Bitcoin and other cryptos.
Investors in the
Grayscale Bitcoin Trust
(GBTC), one of the largest Bitcoin funds with over $30 billion in assets, is feeling the pain. GBTC was recently trading at $33.52, a near-record discount of 22% from its net asset value of $43 per Bitcoin share.
It may seem tempting for Bitcoin bulls, but the discount may also reflect lower demand for GBTC, as its fees are higher than other publicly traded securities offering exposure to Bitcoin, including the
ProShares Bitcoin Strategy
ETFs (BITO). Investors also have other options, including companies that hold large stakes in Bitcoin, such as
However, as the prices of the underlying digital assets decline, anything crypto-correlated faces a strong rally until sentiment changes for the better. That might not be happening anytime soon, according to Katie Stockton, founder and managing partner of Fairlead Strategies, a crypto research firm.
“Medium-term momentum remains to the downside,” she wrote in a note released Monday. Bitcoin has support around the $44,000 level, she notes, but if that is broken, the next support level of $37,000 will likely be tested.
Write to Daren Fonda at [email protected]