Crypto crash continues; why has bitcoin fallen 55% over the past 6 months?
Bitcoin is at its lowest level since July 2021.
The cryptocurrency
BTCUSD,
plunged almost 12% Monday to below $30,000, down more than 50% from its all-time high in November, according to CoinDesk data.
Why?
Some analysts attributed the tank to macroeconomic uncertainty. Investors have been selling off risky assets, as inflation rises at the fastest pace in 40 years, U.S. economic growth slows and the Federal Reserve tightens its monetary policy, while the Russia-Ukraine war and supply issues persist.
Though some bitcoin supporters touted it as a storage of value and a hedge against inflation, it has been trading like a risk asset for the past few months.
“The type of market participants that have stepped in over the last few years are largely these macro-trading traditional funds. They are trading bitcoins the way that they trade tech stocks, although a lot of aspects of bitcoin are inherently viewed as risk-off by crypto-native people,” Will Clemente, lead insights analyst at bitcoin mining company Blockware Solutions, told MarketWatch in an interview.
“Bitcoin’s correlation to traditional markets has just kind of been in the driver’s seat lately,” Clemente added. The 30-day rolling correlation between bitcoin and the tech-focused Nasdaq 100
NDX,
hit an all-time high of about 0.8 on Monday, according to crypto data provider Kaiko Research.
The market currently views both bitcoin and the Nasdaq as “long duration, interest-rate-sensitive risky assets,” Brent Donnelly, president of Spectra Markets wrote in Monday notes.
“If the Fed is pouring gasoline on markets in the form of quantitative easing, that’s bullish. If they are hosing down the fire as they transition from arsonist to firefighter, that’s bearish,” Donnelly wrote.
Since March, the Fed has been holding its balance sheet steady at nearly $9 trillion by reinvesting proceeds of maturing securities. The central bank said last Wednesday that it will reduce the size of its balance sheet by $47.5 billion a month for three months starting in June and ramping up to $95 billion a month starting in September.
Jay Hatfield, chief investment officer at Infrastructure Capital Management, attributed bitcoin‘s high return during 2020 and 2021 partly to the Fed’s quantitative easing policy. “We had an unprecedented increase in Fed liquidity, buying $120 billion a month of securities. And now we will have an erratic shift to a reduction in liquidity for $95 billion per month,” Hatfield said.
“Year to date, bitcoin had been holding up relatively well compared to some of its equity-related proxies, but once we broke $38,000, a large portion of holders were underwater, creating selling pressure,” Martha Reyes, head of research at crypto exchange Bequant, told MarketWatch via email.
Investors are also concerned that TerraUSD, a dollar-pegged algorithmic stablecoin, has fallen below $1 on Monday. The cryptocurrency, which is designed to trade at $1, traded at as low as 69 cents on Binance late Monday.
Backers of the Terra ecosystem have voted to issue $1.5 billion in loans, with half in bitcoin, to back the cryptocurrency. Do Kwon, founder of Terraform Labs, which powers the blockchain, earlier pledged to purchase as much as $10 billion in bitcoin to support the stablecoin.