- Bitcoin’s price has tracked blue-chip tech stocks like Apple, Amazon, and Microsoft all year
- The recent market downturn has only strengthened this correlation
Nearly $240 billion has been wiped out of crypto markets since Friday as macro headwinds weighing on digital assets mount.
Bitcoin is down 15% from $36,000 to around $30,700 at press time. Ether and XRP lost 14.5% and 18%, respectively, while Solana’s SOL and Binance coin were the hardest hit among the top cryptocurrencies – both losing 19%.
Overall, crypto is now worth $1.4 trillion (slightly less than Alphabet’s market cap) after losing 15% over the weekend from its low since July 2021.
Crypto stocks have also been hurt. Top mining stock Marathon Digital fell 17% on Monday; Coinbase Plunged 18%; and MicroStrategy plummeted nearly 25% — for a combined total of more than $5.4 billion in shareholder losses.
But bad crypto markets reflect poorly performing stocks across the board. The S&P 500 was down 2.5% on market open and the tech-heavy NASDAQ 100 was down 3.5%.
The S&P and NASDAQ are now down 16% and 26% year-to-date, respectively. According to TradingView data compiled by Blockworks, the total value of cryptocurrencies plummeted by more than 35% over the same period.
In fact, crypto and stock markets have become increasingly correlated, particularly with tech stocks, as Bitcoin’s price has tracked blue-chip tech stocks like Apple, Amazon, and Microsoft throughout the year.
And little has changed in the most recent downturn. In fact, the correlation is getting tighter.
“Right now, correlations are occurring across and within most asset classes, not just crypto,” said Beimnet Abebe, Vice President of Principal Trading Galaxy Digitalsaid Blockworks.
Recent significant changes in monetary policy, Abebe said — on top of the highest inflation rates in a generation — have squeezed crypto and other assets after a period of “extremely easy” quantitative easing-friendly regimes by the Bundesbank.
“Longer term, we will see a decoupling of cryptoassets as tokens mature and each evolve with their own idiosyncratic traits,” Abebe said.
Crypto capitulation breeds innovation
But what does it take to see crypto actually decouple from tech stocks?
David Nage, portfolio manager at crypto investment firm Arca, told Blockworks it could require a full capitulation.
Nage argued that an earlier decoupling of correlations between digital assets and tech stocks occurred after March 2020, when both stock and crypto markets spiraled due to the pandemic turning into a black swan.
Crypto markets kicked off in April, May, and June 2020 while tech stocks were still gaining traction. Many attributed these surges to widespread lockdowns, with day traders turning to digital assets for their stimulus checks.
So it stands to reason that a recovery in crypto markets could be triggered once we see more experimentation in DeFi and gaming and decentralized finance (GameFi), Nage said.
“I definitely think digital assets will potentially decouple from their correlation with stocks to attract interest, and it’s new platforms and innovations that are doing that,” he said.
But Nage doesn’t see huge innovation in DeFi (decentralized finance). Instead, he mostly witnesses copy-paste projects mimicking Ethereum-powered DeFi projects that have been popular in 2020: decentralized exchanges and automated market makers.
“What we’ve seen from past crypto winters, particularly in 2018, is that there’s going to be a time when innovation starts, where founders start to pull themselves together — they start building platforms that capture our attention and use cases attract rather than raise funds every three months,” he said.
Nage pointed to three crypto companies that raised money in the last major “crypto winter”: Fireblocks, OpenSea, and Blockdaemon. These are “formative parts of the infrastructure that have made many things possible today,” he said.
Crypto can still become a tool to fight inflation
If other Layer 1 chains have been hotbeds for innovation, why is the market still following Bitcoin?
“Bitcoin is the most liquid of all crypto assets, so institutions are focusing their energies on it, making it likely to lead crypto market sentiment for the foreseeable future,” said Galaxy’s Abebe.
But crypto advocates once claimed digital assets could be used to hedge against rising inflation and even diversify portfolios. Bitcoin’s losses have instead fueled inflation over the past year, while crypto’s high correlation with tech stocks means digital assets serve as pseudo-leveraged bets on the world’s largest companies.
For Nage, the problem of inflation is now staring us in the face. It’s something that several generations ago didn’t have to deal with. He envisions a period of adjustment that will produce new playbooks, guided by a review of what we’ve been doing previously to contain inflation, “and that’s going to take time.”
“Ultimately, our generation, along with newer generations, will always have an incredible interest in digital assets and technology,” Nage said. “We’re the mobile-native, crypto-native generation – games, mobile devices, the web, that’s what we know.”
The post Crypto Correlates With Tech Stocks More Than Ever – How Do We Decouple? is not financial advice.
Source: Crypto News Austria