BY KRISTIN HOVENCAMP
If the current volatility in the cryptocurrency market is any indication of what is to come, we are in for a bumpy ride. The world’s largest cryptocurrency by market cap, Bitcoin recently plunged almost 50% from its highs. Bitcoin rose to nearly $70,000 in value in November before falling below $35,000 in January. Unlike traditional financial markets, crypto trades 24 hours a day, and with prices moving nonstop, investors have little time to absorb the news. What is destabilizing the global crypto markets?
Investors who have not bought into the crypto craze argue that Bitcoin is not an asset class but trades like risk assets. As economic growth slows and inflation rises, investors generally move money into less precarious investments. Nick Metzidakis, research lead at Tyr Capital, noted that Bitcoin’s emerging behavior as a risk asset implies that investors buy when they take an optimistic view of the economy or sell when they are nervous.
Cryptocurrencies are increasingly trading in line with equity markets, and investors are doubting the use of Bitcoin as a portfolio diversifier or inflation hedge. U.S. equities were recently in correction territory, and cryptocurrency prices followed. For example, the sell-off of technology stocks caused a ripple effect in the crypto markets. Technology stocks often trade on future earnings, and a rise in interest rates could stall growth and create volatility.
Bitcoin believers point to macro events as causing fear in the cryptocurrency market. A tighter U.S. monetary policy means the end of easy money. “Removing monetary accommodation tends to put downward pressure on the price of assets considered risky, including cryptocurrencies and stocks,” noted a crypto analyst on Coindesk.
Asset class or not, Bitcoin investors are keeping a nervous eye on the crypto markets. Whether you are all in on Bitcoin or wouldn’t dare invest a single penny, I would wager to bet you are following its price movement.
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