‘It Hurts Confidence:’ Volatility Upends Happy Crypto Narrative

(Bloomberg) — For a brief moment, everything seemed to be moving in the right direction for digital asset advocates. The U.S. approved ETFs for the two biggest cryptocurrencies, U.S. presidential candidate Donald Trump turned supporter and Bitcoin was no longer so closely tied to stock market fluctuations.

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That was the prevailing narrative until a selloff began in riskier corners of all markets during Asian trading hours on Monday, a reminder that the volatile nature of digital assets can have a negative impact both ways in a year when Bitcoin has soared to record highs. At one point, Bitcoin fell more than 16% on Monday, while second-placed Ether fell as much as 23% in its biggest drop since 2021.

“Every point of selling — you know, the market sells 1% — undermines trust,” said Rich Rosenblum, co-president and co-founder of digital asset investment firm GSR. “I would say there’s more trust elasticity for crypto than any other market in the world because Bitcoin is a Veblen good.”

Veblen goods are a type of luxury item that increases in demand as prices rise. That was the case for cryptocurrencies for much of the first half of the year, especially after the U.S. Securities and Exchange Commission authorized Bitcoin and Ether exchange-traded funds. Bitcoin rose to a record high of nearly $74,000 in March, and advocates urged investors to buy as demand from ETFs outpaced supply. Bitcoin fell below $50,000 at daily lows on Monday, more than halving year-to-date returns from nearly 70% in March.

Just two weeks ago, Bitcoin and global stocks were diverging as Trump’s election push and embrace of crypto boosted the largest digital asset, while stocks were volatile amid an uncertain economic outlook. The 30-day correlation coefficient for Bitcoin and MSCI’s index of world stocks has reached minus 0.20, a rare occurrence for a measure that has been mostly positive since 2020, according to data compiled by Bloomberg. A correlation of 1 suggests the assets are moving in unison, while minus 1 suggests a harmonious inverse relationship.

Bitcoin quickly became more correlated again as the global stock sell-off intensified, reflecting concerns about the economic outlook. Geopolitical tensions are rising in the Middle East, adding to investor unease.

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“Payrolls looked weak, unemployment looked weak,” said Leo Mizuhara, CEO and founder of decentralized finance asset manager Hashnote. “That was one of the first strong signals that the Fed might be behind on cutting interest rates,” he said, adding that this was “bad for risk assets.”

U.S. spot Bitcoin exchange-traded funds experienced their biggest outflow in nearly three months on Aug. 2. Monday’s sell-off will further hurt demand for the ETFs, Mizuhara said.

“This move reminds me a little bit of March 2020 at the beginning of Covid,” said Annabelle Huang, managing partner at digital asset firm Amber Group. Hopefully, she added, “we can see some sort of V-shaped recovery like we did back then, but it all depends on all the macro factors.”

Despite Bitcoin’s volatile performance in the past few months prior to the recent sell-off, the largest digital asset has also received support from former President Trump in recent weeks, who announced that he would create a “strategic national Bitcoin stockpile” if he returns to the White House. Crypto critics have raised questions about the viability of such a Bitcoin stockpile, especially when such a sell-off is always a risk.

Virginie O’Shea, founder and CEO of Firebrand Research, said holding Bitcoin as a strategic reserve is a “great idea.” “If you want a reserve, you need something that is relatively stable in volatile markets. Cryptocurrencies are the opposite.”

The sell-off also led to a drop in market liquidity, according to an analysis by data provider Kaiko. Bitcoin’s 1% market depth across major crypto exchanges like Binance, Bybit, Bitfinex, and Coinbase has fallen by more than 40% since the beginning of August to $86 million, according to Kaiko senior analyst Dessislava Aubert. Kaiko defines this measure of market depth as the average volume of Bitcoin traded within 1% of its current price on a 24-hour basis.

“If the decline deepens, we could see further declines as market makers are likely to reduce their positions to avoid toxic flows,” Aubert said. “We are also seeing a similar decline in the top ten altcoins.”

Memecoins, which are tokens with no utility, were also hit hard by the market crash. Dogecoin and Shiba Inu fell more than 10%, according to tracker CoinGecko. Memecoins have been in the crypto community’s spotlight since some of them posted bigger gains than Bitcoin during last year’s bull run. Because memecoins are a more volatile category, they always suffer losses during panics because they “tend to fly to safety,” said Rachel Lin, CEO of decentralized derivatives exchange SynFutures.

But as always, crypto advocates remain optimistic about the market outlook and say that the positive factors that are driving the market upwards will continue in the coming months.

“Just like in tradfi, there is a shift from short-term derivatives positions to long-term hands,” said Zaheer Ebtikar, founder of crypto fund Split Capital.

–With assistance from Emily Nicolle.

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