The near halving of cryptocurrency prices in recent weeks, mirroring a sell-off in the global stock markets, indicates that digital coins may not be a particularly reliable asset during economic uncertainty.
The Russia-Ukraine war and the US Federal Reserve’s move to scale back monetary support have forced investors to switch from risky assets like equities to safer alternatives. Cryptocurrencies, otherwise deemed a safe bet against inflation, don’t seem to fall in the “safe” category.
The instability of TerraUSD (UST) prices last week aggravated the recent sell-off. On May 12, the prices of Tether, the world’s biggest stablecoin, too, fell below its $1 peg to 95 cents briefly.
“The global economic meltdown and the UST fiasco due to unexpected ignorance of the credible people in the crypto space is the primary cause of the mass crypto sell-off,” Om Malviya, president of Tezos India, a crypto platform said.
A strong correlation with equities
The global stock market rout was driven primarily by the fear of inflation. Prices in the US have been surging at the highest rate since 1981.
The Federal Reserve has vowed a tighter policy. The Economist Intelligence Unit expects seven rate hikes in 2022, taking US lending rates up to 2.9% by early 2023. On May 4, the Fed raised interest rates by 50 basis points to 1%, the biggest hike since 2000.
If this continues, stocks will become unattractive to investors. The S&P 500 index has already lost nearly 10% in the past month, registering a new low for 2022. The decline in cryptocurrencies, however, is even more severe than the one in stock markets—bitcoin prices have declined by 26% in the past month.
A major reason for this is that investors are now treating cryptos as another speculative investment, according to Kanika Agarrwal, co-founder of an India-based portfolio management services company Upside AI. This decline has particularly mirrored the tech stocks, according to her.
“It indicates that the crypto markets are attaining maturity—just like other markets, crypto also has a bear and bull run and at present, we are going through a bearish phase,” Nischal Shetty, co-founder of WazirX, a cryptocurrency exchange said.
Shetty also believes it is a good buying opportunity for investors. Some think otherwise, though.
“The dip has always benefitted crypto investors. But this time, it needs to HODL (hold on for dear life) for long to see the benefit,” Dileep Seinberg, founder and CEO of MuffinPay, a crypto and fintech company told Forbes.