It’s shaping up to be another ugly day in the world of crypto. As of 9:30 a.m. ET Wednesday, most major tokens were trending lower, led by Bitcoin (BTC 3.18%), which had declined 5.3% over the past 24 hours. The world’s largest cryptocurrency by market capitalization was trading above the $20,000 level as of this time Tuesday morning. But a sectorwide sell-off sent it below $18,500 late in the day. At the time of this writing, the token was changing hands in the neighborhood of $19,100.
Things aren’t much better for large-cap tokens Ethereum (ETH 3.34%) and XRP (XRP 3.29%). Those two tokens were down by 5.8% and 9%, respectively, over the past 24 hours, as of 9:30 a.m. ET.
It appears that macroeconomic factors continue to drive negative sentiments regarding cryptocurrencies. The most notable development in the past 24 hours was an overnight shift in the yield on the U.S. 10-Year Treasury. This key bond, which impacts the valuation models for most risk assets and provides the benchmark lending rate for many debt instruments, rose above the 4% threshold for the first time since 2008. Generally speaking, higher yields on “risk free” bonds bode poorly for risk assets. When investors can achieve more attractive returns from lower-risk alternatives, some choose to, pulling funds that might otherwise have gone into those riskier assets away from them. In addition, investors tend to require higher anticipated returns on their risky investments when they have a wider range of good alternatives to choose from.
As has often been the case of late, equities and crypto were trading in high correlation. Early morning declines across all major indices, but particularly the Nasdaq, were reflected by falling prices for risk assets such as cryptocurrencies Wednesday morning.
There really aren’t many token-specific forces at work in Wednesday’s sectorwide decline. And while some investors were clinging onto previous catalysts such as The Merge in their search for reasons to load up on higher-growth digital tokens, bullish sentiment for crypto appears to have eroded.
It makes sense that correlations between stocks and cryptos have increased as crypto investing has become more mainstream. Those who buy crypto (particularly institutional investors) are also invested in stocks. In times like these, when many investors are looking to reduce the level of risk in their portfolios, bonds may seem like a much more attractive asset in the near term.
Over the long term, cryptocurrencies have shown their value as high-growth assets that can amplify returns in bull markets. Coming off one of the longest bull markets in history, the returns investors have seen in the likes of Bitcoin, Ethereum, and XRP are notable. Accordingly, when this market eventually turns around, this is an asset class I think will be worth keeping an eye on.
That said, the question many are asking right now is when this bear market will end. The spring 2021 plunge was followed by a sharp V-shaped recovery. That rebound ended in December, but many still hope for a similar outcome after the even steeper fall that has occurred in 2022. That said, given the inflationary pressures in the economy, bond investors don’t seem to be expecting such a stark pivot on monetary policy. Accordingly, the crypto market may be in for even more downside volatility.