Crypto markets are increasingly acting like speculative assets—no different than tech stocks, commodity futures, and anything pegged to rapid economic growth and excess liquidity.
Bitcoin and other cryptocurrencies were slumping on Monday, falling in tandem with equities that were under pressure due a spate of bad news over the weekend.
Bitcoin was down 2.5% to $46,100 while Ether, the native token of the Ethereum network, was off 3% to $3,800. The
Nasdaq Composite Index
was down 1.4%.
The positive narrative for crypto is getting murkier with the Omicron variant spreading rapidly and central banks priming the market for tighter monetary policies and interest rates in 2022. A fresh blow came on Sunday as Sen. Joe Manchin (D-W. Virginia) said he would not support the Democrats’ Build Back Better legislation, effectively killing the $1.7 trillion package for now.
The tougher outlook has Wall Street trimming U.S. economic growth estimates with Goldman Sachs cutting its first-quarter forecast for gross domestic product growth to 2% from 3%, and lowering the outlook for subsequent quarters.
The correlation between loose monetary policy and rising crypto prices hinges on the idea that investors would rather take a chance on a risky asset like Bitcoin than keep money in the bank , earning zero percent. Yet as the “risk-free” rate rises, so too does the opportunity cost of speculating.
Perhaps more than the math behind that trade off is a sense that 2022 isn’t going to be the liftoff for the global economy that was expected before the Omicron variant, surging inflation, and a political stalemate in Washington, with Democrats unable to advance measures that would have been broadly stimulative.
Moreover, if Bitcoin really is “digital gold,” acting as a store of value and hedge against depreciating “fiat” currencies, it’s not acting that way. The crypto peaked on Nov. 10 at $68,789, according to CoinMarketCap, and it’s been sliding ever since, despite higher inflation readings and prospects of three interest-rate increases in 2022 to combat inflation.
Other cryptos have also fallen into bear markets, despite vastly different uses and applications from Bitcoin. Among them are “smart contracts,” and non-fungible tokens, or NFTs, on the Ethereum network, using the Ether token as currency. Other cryptos are being used for international money transfers, supply-chain management, gaming, and cross-transfers of digital assets or data across different blockchains.
Yet few have been spared in the selloff. Solana, the fifth largest crypto by value with an $88 billion market cap, hit a high of $259 on Nov. 6. It’s now around $182. Avalanche, another major token, worth $26 billion, is at $107, down from peaks of around $134.
Some of the declines may reflect profit-taking after a run-up for many cryptos earlier in the year. And not a day goes by without venture capital plowing into the space; New Venture Capital funds raised $150 million last week with a “Web 3.0 and blockchain gaming focus,” according to Fundstrat Global Advisors.
At a much larger scale, NYDIG, the big crypto custodian, asset manager, and institutional trading firm, recently racked up another $1 billion in funding, valuing it at $7 billion. One reason is that NYDIG could help spread Bitcoin to the masses through a partnership with
National Cash Register
(ticker: NCR), a global ATM company with more than 15,000 banks and credit unions on its network.
“The partnership is expected to bring Bitcoin to over 650 banks and credit unions, or approximately 24 million new consumers,” says Fundstrat.
yet as the macro climate gets tougher, fewer large-scale investors or individuals may be willing to speculate on ever-rising prices for Bitcoin and other cryptos.
Investors in the
Grayscale Bitcoin Trust
(GBTC), one of the largest Bitcoin funds with more $30 billion in assets, are feeling the pain. GBTC was recently trading at $33.52, a near-record 22% discount to its net asset value of $43 a share in Bitcoin.
That might look tempting for Bitcoin bulls, but the discount may also reflect waning demand for GBTC—since it’s fees are higher than other publicly traded securities offering Bitcoin exposure, including the
ProShares Bitcoin Strategy
ETF (BITO). Investors have other options too, including companies that hold significant stakes in Bitcoin, such as
MicroStrategy
(MSTR).
As prices for the underlying digital assets slide, however, anything correlated to crypto faces a steep climb back until sentiment changes for the better. That may not happen soon, according to Katie Stockton, founder and managing partner at Fairlead Strategies, a crypto research firm.
“Intermediate-term momentum remains to the downside,” she wrote in a note out Monday. Bitcoin has support around the $44,000 level, she notes, but if that’s broken, the next support level of $37,000 is likely to be tested.
Write to Daren Fonda at daren.fonda@barrons.com
