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Late last week, cryptocurrencies gained as stocks fell.
Andrew Angelov/Dreamstime.com
Cryptocurrencies are showing signs of trading independently of stocks again—one element of the investment case for the volatile assets—but that isn’t necessarily a good thing.
On Thursday, even as the
Nasdaq Composite
rallied more than 2%, major cryptocurrencies were lower. As of late Thursday morning,
Bitcoin
had fallen about 1% over the prior 24 hours to $29,389, while Ether dropped 5.2%.
Other, less popular alt-coins were also having a bad day. Cardano fell more than 4%; Solana plummeted 6.6%; and Avalanche tanked by 11%.
Late last week, things were reversed, with gains for crypto assets as stocks fell.
The longer-term pattern, though, is for crypto to trade like tech stocks and other risk assets, rising or falling in response to hints on future monetary policy from Federal Reserve Chair Jerome Powell, recession fears, and even earnings disappointments.
For example, when
Snap
plunged in extended trading on Monday after CEO Evan Spiegel warned that the company would miss its revenue and earnings targets, Bitcoin almost immediately followed suit, breaking below $30,000 to hit its lowest price since the second week of May.
But on Thursday, even as inflation expectations moderate and stocks regained some momentum, digital token prices were highlighting warts unique to the asset class.
“Bitcoin’s correlation with the Nasdaq is broken and it probably will stay that way until one last plunge happens in the cryptoverse,” wrote Oanda senior market analyst Edward Moya in an email to Barron’s. “Bitcoin seems like it could still be vulnerable to one last major move lower and that is why many traders are waiting before putting on long-term bets.”
So what’s the problem?
For one, while cryptos are dealing with the same shaky macro backdrop that stocks face, this month they have also had a couple of existential crises layered on top. Those don’t seem likely to fade soon.
The collapse of TerraUSD, the third-largest crypto “stablecoin” with a former market value exceeding $18 billion, is continuing to send shivers through the market. That coin, which was supposed to maintain a one-for-one peg to the dollar through an arbitrage mechanism that failed, underpinned many decentralized-finance projects. Their backers are now scrambling to salvage what’s left of Terra, voting earlier this week to create a new Terra blockchain, but this time without the stablecoin.
The failure has also added fuel to a U.S. crackdown on crypto. Securities and Exchange Commission Chair Gary Gensler cited the collapse as a reason to increase scrutiny and Congress is holding hearings that cite the plunge.
Fed Vice Chair Lael Brainard on Thursday is testifying in the House Financial Services Committee. In her prepared remarks, she said the Terra meltdown, as well as the temporary de-peg of another stablecoin called Tether from $1, were reasons to introduce “clear regulatory guardrails to provide consumer and investor protection, protect financial stability, and ensure a level playing field for competition and innovation across the financial system.”
It remains to be seen how long digital assets will keep the government’s gaze. But crypto’s weakness on Thursday shows that the currencies could do worse than trading in line with tech stocks.
Write to Joe Light at joe.light@barrons.com