Bitcoin’s weekend selloff and subsequent rebound illustrate the crypto market’s volatility, but also its growing connection to traditional asset classes.
Between late Friday night and early Saturday morning, bitcoin’s price fell more than 20%, trading as low as $42,000 at one point. By Monday afternoon, it had recovered some of those losses and on Tuesday afternoon was trading around $50,528, according to CoinDesk. That was still down from $53,670 on Friday afternoon, and about 27% off its high of $68,990 set in November.
Some of the latest selloff was due to liquidations on options exchanges, investors said. But it was also driven by concerns about interest rates, market risk and Federal Reserve policy, they said—issues that have been behind several days of seesaw trading in stocks and other markets.
“There is a correlation between the more active, high-risk equities indices, like the Nasdaq, and the crypto market,” said DailyFX analyst Nicholas Cawley. A few years ago, he said, the connection wasn’t nearly as strong.
Bitcoin has become a more widely held investment over the past two years. About 26% of U.S. investors have crypto holdings, a survey of about 1,000 investors from Grayscale Investments found. When it ran the same survey two years ago, it didn’t report on how many respondents owned bitcoin, focusing instead on how many were open to the idea.
This year, investors have put $9 billion into crypto funds, the asset-management company CoinShares reported, up from $5.6 billion in all of 2020. The assets under management for those funds have swelled to $73 billion from $18.8 billion in 2020.
Those funds attract a more professional trader than spot exchanges or mobile apps, and reflect the changing nature of crypto investors.
“‘There is a correlation between the more active, high-risk equities indices, like the Nasdaq, and the crypto market’”
The connection is also clear in the movements of bitcoin and the major indexes. Like the Dow Jones Industrial Average, S&P 500 and Nasdaq Composite, the price of bitcoin bottomed in March 2020 after the coronavirus pandemic struck. It started rising again, as did equities, after the Fed and other central banks began aggressively cutting interest rates and pumping trillions worth of liquidity into the capital markets. That made risk assets far more attractive to investors compared with safer but less profitable bonds.
Last week, the chairman of the Federal Reserve, Jerome Powell, told lawmakers the central bank was prepared to quicken the pullback of its easy-money policies, and raise interest rates sooner than expected. Higher interest rates make risky assets such as bitcoin less attractive.
Equities were volatile after Mr. Powell’s comments, but didn’t lose too much value. The Dow fell less than 1% for the week, while the Nasdaq fell about 2.6%. Bitcoin, which usually sees larger gains and losses than equities, fell about 8% last week, with most of that coming on Friday.
Equities trading, however, closes at 4 p.m. ET on Friday. Bitcoin exchanges never close. “The weak price action to end the week extended into a less liquid weekend session,” said New York-based trading and asset-management firm NYDIG.
The hours between late Friday and Saturday represented a “toxic combination of low liquidity, excessive leverage and overconfidence,” DailyFX’s Mr. Cawley said. Once bitcoin’s price fell below a certain support level—around $53,000, he estimated—traders started getting liquidated out of their positions.
There was a sharp increase in liquidations of options contracts, according to research firm Coinglass. About $2.5 billion of options were liquidated on Friday—compared with $162 million the day before—with $2.1 billion coming from “long” bets, or options priced for a rise in bitcoin. About 6.4% of offshore leveraged positions were liquidated in a 24-hour period from Friday through Saturday, according to NYDIG, the most since about 28% of open interest was liquidated during an April selloff.
“It was kind of the perfect storm,” Mr. Cawley said of the combination of factors that weighed on bitcoin.
Selloffs like this one are to be expected, said Mati Greenspan, founder and chief executive of crypto-focused research firm Quantum Economics.
“These kinds of pullbacks are part and parcel of a market that is increasingly hungry for excessive risk,” he said. But it is surprising—for crypto investors, at least—that bitcoin is tracking equities at all, he said, since it and other crypto assets were held out as alternatives to central bank-driven capital markets.
“The more I think about it, the more this apparent tight correlation between crypto and stocks really bugs me,” he said.
Write to Paul Vigna at [email protected]
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