This week brought the most brutal crypto rout of 2022.
Yesterday, the bitcoin price was down 26% for the week. Ethereum’s price crashed 35%, BNB
The world’s biggest one, tether, dropped its peg with the dollar and plunged to $0.95 for the first since 2017. Meanwhile, terraUSD and luna—its algorithmic peers—lost 85% and 99% of their value before their blockchains were halted.
On the positive side, this morning bitcoin and major altcoins rebounded by double digits. Still, commentators, including Bitcoin’s
“The $BTC all-time high is $68,990. An 80% draw-down is $13,798. $27k is about halfway there,” it tweeted yesterday.
[Ed note: Investing in crypto is highly speculative and the market is largely unregulated. Anyone considering it should be prepared to lose their entire investment.]
Digital generated image of golden deflated balloon in shape of bitcoin sign lying down on purple … [+]
Zooming out
Who’s to blame for this rout? Many analysts pin it on stablecoins.
“Shockwaves swept through cryptocurrency markets on Thursday as tether, the largest “stablecoin” and a foundational part of the digital asset ecosystem, broke its peg to the dollar in the latest blow to the struggling sector”, Alex Hern of the Guardian wrote.
However, it’s likely the other way around. The crypto market had been chugging downhill since May 4, which perfectly coincides with the Fed’s half-point rate hike. After that, stocks crashed and the tech-heavy Nasdaq lost 13% of its value.
That makes sense. As I wrote before, cryptos are highly correlated to risk assets, especially tech stocks. And since they have a higher beta, they work as a de facto amplifier of stock moves:
“For starters, major cryptos are highly correlated to the stock market. They also have a high beta to stocks. That means crypto, in effect, amplifies stock moves. If stocks soar, cryptos soar higher. And vice versa. If stocks tumble, crypto goes into free fall.
Then the rout in stocks stirred up panic selling in cryptos. And in turn, the sell-off in cryptos wreaked havoc on algorithmic stablecoins, such as terraUSD, which has to do with how they are constructed.
Here’s a good explanation from Coindesk’s Ekin Genç:
“TerraUSD
The thing is, this arbitrage system breaks when there are large withdrawals and not enough demand to offset them, e.g. in a market crash like the one we just saw. Think of it as the bank run of stablecoins.
Looking ahead
If recent market moves are any indication, crypto is largely at the mercy of other risk assets and how they’ll fare during the Fed’s battle with inflation.
That’s because, despite its store of value promise, crypto is still a high beta version of stocks. And its “reactivity” is only growing stronger. In a recent analysis, Coindeks reports that bitcoin’s correlation to Nasdaq is the highest on record.
Are we going to see a “decorelation” anytime soon? Time will tell. But so far, crypto price action points to the contrary.
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