‘We Live for This Moment,’ Crypto Exec Says of Harsh Market Contraction

Coming off of the latest US Federal Reserve minutes Wednesday, both cryptocurrencies and equities saw a slight bounce during trading hours on Thursday, but the bear market is far from over, analysts say. 

James Butterfill, head of research at digital asset-focused investment firm CoinShares, wrote in a recent research note that bitcoin is “increasingly being seen as an interest rate sensitive asset,” adding the Fed’s “aggressive moves” in terms of raising rates could have triggered the cryptocurrency’s recent dip. A correction has been “needed,” in Butterfill’s estimation “ to flush out irrational exuberances” lingering from the long-running bull market. 

Added ButterFill: “We do not believe this market rout has finished just yet, the combination of a continued hawkish Fed and likely failures in the exchange and mining sectors could well push prices lower in the short-term.”

Regulatory officials agreed last month that interest rates may need to increase at a faster pace to combat modern-day record inflation, likely triggering a 75 basis point hike in July, or higher, some analysts speculate. Futures markets taking directional bets on rate rises, however, have largely priced-in the likelihood of a raise no higher than 75 basis points. 

“Interest rates impact all financial assets, this is no different for cryptocurrency,” Daniel Keller, co-founder of decentralized blockchain Flux, told Blockworks. “Most in the crypto space are a bit numb to the ebbs and flows of the conventional market, however; we have seen major changes ‘priced in’ to blockchain-based assets that are traded 24/7/365.”

Bitcoin and other cryptos, which were once seen as a hedge against inflation for their relatively uncorrelated trading patterns, are no longer the safe haven some once believed, Keller added. 

In May, the correlation between bitcoin and the tech-heavy Nasdaq broke 0.8 for the first time — bitcoin’s tandem trading to the S&P 500 also hit similar levels in early May. In June, the correlation between bitcoin and the S&P 500 fell to around 0.5, according to Coin Metrics data. A coefficient of one means the corresponding assets are completely aligned, while a negative-one reading signals the opposite. 

“The reactionary pullback to rate increases will continue to impact the emerging and disruptive tech sector moving forward until the adoption curve has reached critical mass,” Keller said. “I will also note that this is the opportunity to enter new markets in a clear corrective cycle. In the blockchain space, we live for these moments.”

Plus, Chris Kline, chief operating officer at Bitcoin IRA pointed out, rising rates and inflation impact the labor market. 

“A big thing folks should probably be watching is layoffs, and when are they coming,” Kline said. “That’s my big question, because it has to happen. And it’s not just crypto, tech stocks are taking a beating this year.” 

If cryptos continue to correlate to technology equities, the road to recovery will be long, according to Nicholas Colas, the co-founder of Datatrek Research. 

For the Nasdaq to regain its November highs, the index would have to rally 41% from Wednesday’s close. For the S&P large-cap tech sector, which peaked in December, to return to a record market capitalization would necessitate a 36% jump. 

“When will US tech stocks get back to their November/December 2021 highs?,” Colas said. “Exactly as long as it takes the S&P 500 to get back to its highs, because tech…is such a large part of the S&P 500 (27% and 24%) that it is hard to see the two diverging very much.” 

Still, this also means tech ought to outperform during the next bull market, Colas added. 

“The bottom line here is straightforward: Whenever you think stocks have bottomed, consider tech as a long-term overweight,” Colas said. “Growth is a scarce commodity, even in an economic/market cycle recovery, and tech is best positioned to deliver it.”

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