So much for bitcoin being digital gold.
The world’s most valuable cryptocurrency was down 10 per cent Monday after plunging again over the weekend. Bitcoin prices have now plummeted nearly 20 per cent in the past week. At a price of just below US$31,000, bitcoin is more than 50 per cent below its record high of near US$69,000 from late last year and at its lowest point since July 2021.
Other cryptocurrencies, sometimes referred to as altcoins, have been hit hard too. Ethereum, binance, solana and cardano are all down about 15 per cent in the past week, while Elon Musk’s beloved dogecoin has tumbled 10 per cent.
Cryptocurrencies are proving to be just as risky as stocks and susceptible to the same concerns that are dragging down the Dow, S&P 500 and Nasdaq.
“Volatile trading in digital assets has not been that unusual in previous years,” said Michael Kamerman, CEO of trading platform Skilling. “Cryptocurrencies are increasingly moving in sync with tech stocks with investors treating both as risk assets and often retreating to safer corners of the market during bouts of market volatility.”
Kamerman said he is still bullish on bitcoin for the long term. More hedge funds and other big institutions are starting to invest in crypto, and some global central banks are beginning to embrace it too.
But he added that “bitcoin is not immune to the global inflation risk spreading across most other asset classes. Therefore we should expect to see the downward trend continue.”
BITCOIN HIT BY THE SAME PROBLEMS DRAGGING DOWN STOCKS
Inflation fears, worries about big interest rate hikes from the Federal Reserve and jitters about a possible economic slowdown have rattled Wall Street and sent bond yields skyrocketing.
The 10-year Treasury bond yield is now hovering just above 3.1 per cent, having more than doubled this year. Long-term bond yields are now at their highest level since November 2018.
The surge in yields has also helped lift the value of the dollar, which tends tor rise in tandem with interest rates. The U.S. Dollar Index is now trading near its highest level in twenty years. That’s bad news for bitcoin too, as many crypto backers point to dollar weakness as a bullish sign for digital currencies.
As rates (and the dollar) continue to climb, some crypto skeptics think the selling in bitcoin has only just begun. The Federal Reserve is starting to pull back on monthly bond purchases and other stimulus which could be bad news for all sorts of speculative assets.
“The dramatic reversal of Fed liquidity … will collapse the pandemic era bubble in crypto currencies, money losing tech companies and meme stocks,” said Jay Hatfield, chief investment officer of Infrastructure Capital Management and manager of the InfraCap Equity Income ETF.
Hatfield said he thinks bitcoin could plunge as low as US$20,000 by the end of the year.
The crypto collapse is also hurting several stocks with exposure to the industry. Broker Coinbase plummeted 17 per cent Monday and is down more than 65 per cent this year. Robinhood, which also lets people buy and sell some cryptocurrencies, has fallen more than 45 per cent in 2022.
And shares of several cryptocurrency miners, the companies that run servers which solve the complex mathematical puzzles needed to generate new bitcoin and other cryptos, have tanked too. Hive Blockchain, Marathon Digital Holdings and Riot Blockchain are all down between 50 per cent and 60 per cent this year.
The massive pullback in these and other momentum tech stocks is yet another sign of the rapid shift in the market’s mood this year. The CNN Business Fear & Greed Index, which measures seven indicators of market sentiment, is in Extreme Fear territory.
Investors may continue to shun volatile cryptos in favor of safe havens, such as dividend-paying blue chip stocks.
Traders are “more reluctant to adopt the additional risk associated with the crypto sphere,” said Tammy Da Costa, an analyst at DailyFX, in a report.
She added that “the future of individual coins or tokens remains dubious” and that “interest rate hikes are likely to jeopardize the short-term potential for profits” in bitcoin, ethereum and other established cryptos.