Bitcoin, Ethereum, and Dogecoin Recover in Quick Reversal

The yen-driven rout in crypto markets on Monday didn’t last long. On Tuesday, major cryptocurrencies jumped in value, but they didn’t return to their levels from earlier in the weekend.

Bitcoin (CRYPTO: BTC) was up 7.4% as of 2:30 p.m. EDT; Ethereum (CRYPTO: ETH) was up 6.4%; and Dogecoin (CRYPTO: DOGE) was up 5.3%. This reflected a recovery in the equity market and continued the correlation between stocks and cryptocurrencies during days of high volatility.

Yen carry trade rebounds

Yesterday’s move was driven by the unwinding of a yen carry trade, a leveraged bet on currencies and interest rates. But as the trade unwinds, unrelated assets like cryptocurrencies can also result. That’s why the market crashed yesterday.

Today, there was only a recovery from yesterday’s decline. However, the process of unwinding such trades and getting rid of leverage may not be over yet. If a few days do not form a trend and more leveraged trades experience rapid losses, there may still be volatility ahead.

ETFs are seeing an uptick

What’s notable in the crypto market is the $423 million outflow from Bitcoin exchange-traded funds (ETFs), according to Bloomberg. The growth of ETFs has brought billions of dollars of new investment into the sector, which may not be sustainable given the decline in valuations.

For now, the ETF business is doing well, but further declines in crypto assets could lead retail investors who are buying crypto for the first time to question the value of the asset.

The biggest fear is economic

What’s been missing from the recent surge in cryptocurrencies is the bigger economic picture. Crypto trading has been associated with growth stocks. One of the biggest reasons for a longer-term decline for crypto is weak economic news, like last week’s relatively weak jobs report.

Zooming out, Bitcoin is down 13.8% over the past week; Ethereum is down 23.9%; and Dogecoin is down 21.9% during that time as investors are selling riskier assets. Crypto falls into this camp and is falling as a result.

Without a real foundation to propel the cryptocurrency market upwards, a sell-off is possible if the economy takes a turn for the worst.

Where is crypto going next?

The tailwinds behind cryptocurrencies over the past year have been intense, including the rise of growth stocks and risk assets, and the launch of crypto ETFs. There has naturally been a spike in anticipation of some of these actions, but they are not repeatable over the long term.

What could be more effective in the long run is a change in the regulations and legal frameworks governing crypto in Washington, D.C. But this might not just be about getting more people to buy tokens. This will open the door to blockchain innovation, new business formations, and financial transactions that will bring crypto into the mainstream, but that could include stablecoins, not cryptocurrencies themselves.

The story continues

Given the volatility in cryptocurrencies today and the possibility of a recession later this year, I think caution is warranted. This hot period in the crypto market could end quickly. Ironically, it may be due to the slower US economy.

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Travis Hoium has positions in Ethereum. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.

The post Bitcoin, Ethereum, and Dogecoin Recover with Rapid Rebound was originally published by The Motley Fool