When investors get stressed out, risky assets are often the first to be dumped. It seems like that is exactly what's been happening this week, with a steep slide in prices of Bitcoin, Ethereum and other cryptocurrencies.
Bitcoin's price fell below $42,000 on Friday, the lowest it's been since since September and about a 40% drop off its high in November. Ethereum's price also fell to its lowest in just over three months. The crypto market's plummet was accompanied with a slump in many tech stocks.
This week's price slide for cryptos started after Federal Reserve minutes released Wednesday revealed the central bank may raise interest rates sooner than earlier anticipated. And Reuters reported that political upheaval in Kazakhstan — a popular bitcoin mining hub — is hitting the Bitcoin mining network with internet shutdowns.
Bitcoin had a wild run in 2021, with the price hitting a high above $68,000 in November. Some experts are even predicting Bitcoin's price will hit $100,000 over the next few years. Dogecoin and many other trendy cryptos have soared in value over the past year as well.
Despite the market's significant growth, cryptos are still risky and speculative assets — and those tend to be the first to go during market stress.
“When Bitcoin is rallying you know, alright investors are willing to take risks," says Matthew Tuttle, chief executive at Tuttle Capital Management. Typically, when Bitcoin is rallying, so are other speculative assets, like higher beta stocks (higher beta stocks are considered to have a higher level of volatility than the overall market).
"When Bitcoin is selling off, that a lot of time tells you, alright investors are scared," he adds. "They’re not willing to take risks right now.”
So the rise and fall of Bitcoin's price can be used as a barometer to measure the appetite for risk in the broader market.
What happens as Bitcoin becomes a mainstream investment
Institutional investors — which include investors that pool money to invest like hedge funds — are getting in on the action as well. Slightly more than half of institutional investors across Asia, Europe and the U.S. surveyed by Fidelity Digital Assets in 2020 and 2021 said they own digital assets, and seven in 10 said they expect to buy or invest in digital assets in the future, the survey found.
"We’re continuing to see crypto move out of the niche early adopter phase," says Adam Grealish, head of investments at the financial technology company Altruist. "There’s a broader base of folks adopting it, which means there are going to be less idiosyncrasies in the market."
In other words, if a smaller group is trading an asset, that asset will be influenced by what is going on in that small group's ecosystem. But as Bitcoin goes more mainstream, it's more correlated with other risky assets that investors own.
Bitcoin's price plummet may be scary for crypto investors, but remember that it's not uncommon. In December, Bitcoin's price dipped more than 20% at one point after comments from the Federal Reserve indicated the central bank may end support for the economy sooner than many hoped. The cryptocurrency's price also suffered from fear around the COVID-19 Omicron variant. Bitcoin then quickly recouped some of its losses.
Financial advisors tend to recommend that if you are going to invest in a risky asset, you should treat it as a long-term investment and not panic about every price fluctuation — especially since they'll continue to happen over and over.