BITCOIN extended its slide into the weekend as the most speculative of assets continues to be hit the hardest while the excesses of the last few years get wrung from global markets.
The largest cryptocurrency by market value approached US$40,000 for the first time since late September, bringing its losses since a peak just 3 months ago to about 42 per cent. Ether, the second-largest digital asset, also declined, while popular DeFi tokens such as Uniswap and Aave remained under pressure into the weekend.
The choppiness comes amid signs that the Federal Reserve is getting ready to combat persistent inflation through the withdrawal of stimulus. Minutes from the central bank's December meeting, published on Wednesday (Jan 5), the Fed flagged the chance of earlier and faster-than-expected rate hikes as well as a potential balance-sheet rundown. Those actions would remove liquidity from the system, which could dull the shine of high-growth and speculative assets.
"If the Fed is going to be more aggressive, risk assets, including cryptos, are more vulnerable," said Matt Maley, chief market strategist for Miller Tabak + Co.
Bloomberg Intelligence's Mike McGlone said US$40,000 is an important technical support level for the digital token. But he projects that Bitcoin will eventually come out ahead as the world increasingly goes digital and the coin becomes the benchmark collateral.
The Bloomberg Galaxy Crypto Index, which tracks some of the largest cryptocurrencies, had lost roughly 10 per cent through Friday from the start of the year.
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The declines across the asset class might be the beginnings of a "mini bear market", according to Eric Ervin, chief executive officer at Blockforce Capital. Recent investors may pull out, leaving the long-term holders as the primary owners.
"It is heart-pounding, nerve-racking for any investor that's looking at it, especially if they come from a traditional equity market," he said. But, he added, "this is completely normal for this asset class".
Indeed, Bitcoin and other cryptocurrencies are infamous for their volatility and have been known to post huge up or down swings, sometimes in a matter of minutes.
Weekend trading can exacerbate the volatility. That's owing to a few factors, including thinner trading volumes and a market structure that consists of hundreds of disconnected exchanges that in effect are their own islands of liquidity. At the start of December, Bitcoin posted a weekend flash-crash that saw it losing 21 per cent at its worst.
To true believers, Bitcoin is the ultimate store of value, the most solid hedge against the rampant inflation manufactured by reckless central banks and their money-printing.
To sceptics, the crypto world as a whole is a mirage whose massive runup past US$2 trillion was simply the speculative byproduct of the extraordinary amount of easy cash that's been sloshing around in the global economy.
Both of those theories are about to face their biggest test yet.
"If they're going to hike rates three times in 2022 and keep the programme, and the era of low rates is over, we're going to really see how much people believed in their Bitcoin-crypto thesis," said Stephane Ouellette, chief executive and co-founder of crypto platform FRNT Financial Inc. "I would expect that the Fed getting more and more hawkish is very bad for valuations."
For most of its 13-year history, Bitcoin has enjoyed an environment of easy monetary policy and zero or negative rates. With rates at rock-bottom lows, investors have been forced to scour the market for higher-yielding opportunities and many turned to crypto given its ability to post outsize gains.
So what happens when financial conditions become tighter?
The last time the US central bank raised rates was in December 2018, its final increase in a series of hikes. Back then, Bitcoin was trading at about US$3,700 and concepts such as "decentralised finance" and "non-fungible tokens" were years away from entering the vernacular. It turned out to be a rough year for the original cryptocurrency. Bitcoin lost more than 40 per cent during the last 2 months - a period that also coincided with a walloping in US stocks.
That dynamic is playing out again now, with Bitcoin falling in step with richly-valued equities ahead of an expected new round of Fed tightening, says Peter Boockvar, chief investment officer at Bleakley Advisory Group and editor of The Boock Report. BLOOMBERG
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