Cryptoverse: Buy the dip? Bitcoin is a newbie in fees

A Bitcoin bill and a dollar bill are seen in this illustration image taken on September 27, 2017. REUTERS/Dado Ruvic

May 10 (Reuters) – Bitcoin has little experience with rising interest rates, posing a danger to investors looking to capitalize on its drastic drop.

The cryptocurrency has plunged along with other risky assets such as tech stocks after the Fed hiked rates last week, sending them on a trajectory expected to exceed 3% early next year.

Bitcoin was an awkward child on the fringes of finance during the Fed’s previous tightening cycle, from 2016 to 2019, and was barely correlated with stocks. The last time interest rates hit 3%, in 2008, it was just a gleam in Satoshi Nakamoto’s eye.

Cryptocurrency price movements are unnerving at best, let alone when the market is entering uncharted waters, increasing the level of risk for traders considering buying into the dip.

Bitcoin fell to $29,731 on Tuesday, its lowest level since July 2021, after falling almost 12% last week, its worst weekly loss since January.

“This is not the first time we’ve hit this level, and the risk-reward ratio for picking up bitcoin here has been very good over the last year, but we’re looking at a different macro backdrop,” Matt said. Dibb COO of Stack Funds, a crypto platform based in Singapore.

“The concern is that this time around is different as to whether we will see continued weak sentiment in traditional financial markets, which is likely due to the inflation outlook and the likelihood of a rate hike in the coming months or years.” .

The Fed’s rate hike of 50 basis points last week was the highest in 22 years. Additional 50bp gains are expected in both June and July, with the possibility of a fourth move in September according to the CME group’s FedWatch tool.

“The era of free money is over. There’s a big adjustment in investor appetite happening right now,” said Chris Kline, COO and co-founder of Bitcoin IRA in Los Angeles.

Ether, the world’s second-largest cryptocurrency, fell to $2,360 on Monday, its lowest mark since February, and smaller coins, or “altcoins,” have been selling off more aggressively.

“The more speculative altcoins are going to struggle, as we’ve seen in past times of volatility in the crypto space. Bitcoin is considered risky, but some altcoins are even more risky and will see even bigger sell-offs,” he said. Kline.

“The question mark is, will people see (cryptocurrency) as a diversification tool in bad economies? Or is it just a must-have when times are good?”

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“What is interesting is that bitcoin itself has not declined as much as the Nasdaq and other asset classes, but the correlation has tightened between them. It is certainly a higher correlation than we have seen in the past. said Benjamin Dean, director of digital assets at WisdomTree in London.

The Nasdaq (.IXIC) and the S&P 500 (.SPX) posted their fifth straight week of declines last week and the Dow Jones (.DJI) their sixth. It was the longest losing streak for the S&P 500 since mid-2011 and for the Nasdaq since late 2012.

The correlation of cryptocurrencies with stocks is one of the reasons for their recent cryptocurrency sell-off.

“We are getting feedback from investors in some family offices that they are liquidating crypto because they are liquidating other assets, and they need to offset it on their book for this quarter to show that they are not dying on everything and have some extra money to get back into stocks. when they hit bottom,” said Dibb of Stack Funds.

Some also point out that liquidations occur periodically in the markets.

“From my perspective, two-way price action and occasional washes are healthy for markets, including crypto,” said Brandon Neal, chief operating officer of Euler, a project that enables lending and borrowing of crypto assets.

However, he added a note of caution.

“We have never seen crypto in a recession, and nobody knows what will happen.”

Reporting by Medha Singh and Lisa Pauline Mattackal in Bengaluru Editing by Alun John and Pravin Char

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