Wall Street put the wind at its back on Tuesday, with investors finally deciding that they’d seen enough bad days in a row. With futures contracts for the Dow Jones Industrial Average (^DJI 0.00%), S&P 500 (^GSPC -1.03%), and Nasdaq Composite (^IXIC 0.00%) up between 1% and 2%, it appeared that the major market indexes would have a good morning after the S&P hit new 2022 lows at the end of trading on Monday.
Bitcoin (BTC 6.31%) also roared back above $20,000 after seeing intense pressure recently, and many other digital assets and cryptocurrency stocks posted sizable gains. Yet with Bitcoin and Ethereum (ETH 5.94%) still down substantially from their respective 2021 highs, the unanswered question is whether Tuesday’s rally will finally be the one that ends the wintry mood in the crypto markets — or just fizzle out like so many other rebound attempts have in recent weeks.
What’s happening in crypto?
Bitcoin’s 7% gains to around $20,250 were representative of moves across many digital assets. Ethereum was up more than 7% as well, challenging the $1,400 mark for the first time in more than a week. Solana and Chainlink were up 7% and 9% respectively, while Uniswap led the way higher among major digital assets with an 18% jump.
Stocks that are linked to the success of cryptocurrencies also fared well in premarket trading on Tuesday morning. Coinbase Global picked up more than 6%, while mining companies Marathon Digital Holdings and Riot Blockchain gained 8% and 7%, respectively. Software company MicroStrategy, which is better known for its high balance sheet exposure to Bitcoin than its core business, rose nearly 6% Tuesday morning before the regular trading session began.
The U.S. dollar takes a breather
Many cryptocurrency watchers looked at the performance of the U.S. dollar as the key reason for the bounce in Bitcoin and other digital assets. Investors have grown increasingly concerned about the pace at which the U.S. dollar has appreciated against key foreign currencies, most notably the British pound, which fell to multidecade lows earlier this week.
At least for today, though, the greenback took a breather. The pound picked up more than 1% against the U.S. dollar, rising to $1.08. The euro was up slightly but remained below parity, fetching $0.965.
Yet it’s important not to overstate the role that the currency markets might be playing in holding back cryptocurrency values. Even when you measure Bitcoin’s value in British pounds, for example, the leading digital asset’s price has still fallen by well over half from its late 2021 peak.
When will crypto really turn higher?
In the short run, policy tactics designed to slow the pace of market moves can halt declines in asset prices, whether it’s in stocks, foreign exchange, or cryptocurrencies. Over longer periods of time, though, macroeconomic factors will continue to play a vital role, and it’s there that investors face the most uncertainty right now.
At least to date, though, digital assets like Bitcoin have proven to be disappointingly correlated with the higher-growth portion of the stock market. Just as higher interest rates have called into question how well smaller, more speculative companies will be able to attract necessary capital to foster future growth, they’ve also made cryptocurrency investors more cautious in focusing on fundamentals rather than on the high-leverage trading vehicles that drive so much of the volatility in crypto markets.
Those correlations might play to Bitcoin’s advantage if stock markets put in a sustained rebound from current levels. Yet in the long run, if Bitcoin wants to reach its full potential, it will have to prove its continued status as a completely different asset class with the ability to outperform regardless of what other markets are doing. That was largely the case early in Bitcoin’s history, but skeptical investors will need to see it happen again in order to regain confidence in the digital asset markets.
Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin, ChainLink, Coinbase Global, Inc., Ethereum, Solana, and Uniswap Protocol Token. The Motley Fool has a disclosure policy.
