Bitcoin has little experience with rising interest rates, which creates risks for investors looking to capitalize on its dramatic decline.
The cryptocurrency has tanked along with other riskier assets such as tech stocks after the Fed raised rates last week, sending them on a trajectory that is expected to pass 3 percent early next year.
During the Fed’s last tight cycle, from 2016 to 2019, bitcoin was a weird child on the frontier of finance, and barely correlated with stocks. The last time interest rates fell by 3 percent was in 2008, but it was a glimmer in Satoshi Nakamoto’s eyes.
Crypto price moves are shocking at the best of times, far from entering the unknown waters of the market, raising the risk level for traders looking to take a plunge.
Bitcoin fell on Tuesday to $29,731, its lowest level since July 2021, having fallen nearly 12 per cent last week, its worst weekly loss since January.
“This is not the first time we have reached this level, and the risk-reward ratio for taking bitcoin here has been great over the past year or so, but we are seeing a different macro background,” said Matt Singapore. Dib COO of the crypto platform Stack Funds based.
“The concern is different this time around whether we will see continued weak sentiment in traditional financial markets given the outlook for inflation and the potential for rate hikes over the next few months or years.”
The 50 basis point increase in the Fed’s rate last week was the biggest in 22 years. According to CME Group’s FedWatch tool, a 50 bps increase is expected in both June and July, with the possibility of a fourth move in September.
“The era of free money is over. There’s a big adjustment in investor appetite 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 mark since February, and smaller coins, or “altcoins,” have been selling more aggressively.
“As we have seen in the past volatile times in the crypto space, more speculative altcoins are going to struggle. Bitcoin is considered riskier, but some altcoins are even more risky and will have an even bigger selloff,” Said line.
“The question mark is, will people see (crypto) as a diversification tool in bad economies? Or is it something when times are good?”
bitcoin weekly chart https://fingfx.thomsonreuters.com/gfx/mkt/myvmnyloxpr/btceth%20May%209.png
What happens in a recession?
It’s not just the crypto markets that are faltering. Equity markets also tumbled as investors fear global central banks are poised to push economies into recession, if necessary, to rein in inflation.
“Interestingly, bitcoin has not declined like the Nasdaq and some other asset classes, but the correlation between them has strengthened. It certainly has a higher correlation than in the past,” Benjamin Dean said. Director of Digital Assets at WisdomTree in London.
The Nasdaq and S&P 500 posted declines for the fifth straight week last week, and the Dow Jones for the sixth week in decline. It was the longest loss for the S&P 500 since mid-2011 and for the Nasdaq since late 2012.
The correlation of crypto with stocks is one reason for its recent crypto 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 show in their book for this quarter that they don’t die in everything. And they’ve got some money to get back into equities when they exit the bottom,” said Dib of Stack Funds.
Some have also noted that there are periodic sell-offs in the market.
“From my perspective, two-way price action and the occasional washout are healthy for markets including crypto,” said Brandon Neal, COO of Euler.
However, he added a note of caution.
“We have never seen cryptocurrencies go downhill, and it is anyone’s guess what will happen.”
Bitcoin Correlations: https://fingfx.thomsonreuters.com/gfx/mkt/dwpkrybdzvm/Bitcoin%20correlations.PNG