May was one rocky month for the crypto world.
The first weekend brought a broken TerraUSD peg which sent the stablecoin tumbling down in price. The sister Terra Luna coin has dropped nearly 100% in the same month.
As of May 23rd, Terra LUNA still sits at a fraction of a cent, a far cry from reaching nearly $120 per coin in early April. TerraUSD ranged between 8 and 9 cents on the same date, still having not recovered its dollar peg.
The massive crash sent the crypto world into an uproar and brought plenty of attention from mainstream media as well. Reports from later in May revealed Tether, the well-known stablecoin, had paid out at least $10 billion in withdrawals over the month, leading the Guardian to write how the company “is effectively dealing with a slow-motion bank run.”
Many other top cryptos have also suffered as sellers look to make moves amid a lot of uncertainty. The price of Bitcoin dipped below $30,000 more than once so far in May, a price point not seen since 2020. Interestingly, May has traditionally been one of the strongest months for the flagship cryptocurrency based on seasonal price points and average data over the past several years.
Some remain concerned the slide with Bitcoin and other top cryptocurrencies, like Ethereum, Solana, and Binance Coin, could get even worse. Guggenheim Chief Investment Officer Scott Minerd told CNBC at the World Economic Forum in Davos how Bitcoin’s dip below $30,000 meant “$8,000 is the ultimate bottom.”
While Minerd did have some stinging comments about crypto, remarking how most virtual currencies are “not currencies, they’re junk,” he did bring up a notable point when mentioning the Federal Reserve’s restrictive policies as a potential downside for Bitcoin’s price prospects.
Are Crypto And Stocks Correlated? The Answer Might Surprise
Many assume the activities of traditional financial institutions like the Federal Reserve and the stock market have nothing to do with cryptocurrency. This actually isn’t the case.
Cryptos like Bitcoin, as part of the financial marketplace, are affected by general investor confidence and sentiment – often driven by news and activity by traditional regulators.
While the price crashes of TerraUSD and Terra Luna have certainly affected the wider crypto market, 2022’s stock market slides have also had a profound impact. Ledn’s Armando Aguilar explains how the “S&P 500 and NASDAQ have had the largest correlations to Bitcoin with 0.88% and 0.91%, respectively. A correlation of one means that they move equally one to the other.”
As of late May, the S&P 500 and NASDAQ had been down for the seventh week in a row. Investor confidence has also been mitigated amid disappointing earnings from major retailers like Target and Walmart. CFRA Research’s Sam Stovall argued in mid-May how the NASDAQ and Russell 2000 have already slipped into the bear market range, meaning the duo was 20% off their recent peaks.
There’s never a single reason for why markets ebb and flow, and 2022 is no exception. Investor confidence has been rattled by supply chain issues, oil price changes, the Russian-Ukraine war, and the impact of COVID outbreaks in China. Inflation has been another key issue. The April 2022 Consumer Price Index was up 8.3% from 2021 as the Federal Reserve continued to embark on notable interest rate hikes in an attempt to combat inflation. These types of moves always make investors nervous.
Is There Any Hope For Crypto If The Stock Market Is In The Doldrums?
Many might wonder how the crypto markets became so linked with stocks. The answer largely lies in the role of institutional investors.
A report from Genesis Trading in April 2022 makes a link between a “sustained jump in the 60-day correlation between BTC and the S&P 500” and “the influx of institutional interest in BTC, which started to pick up in early 2020 with public declarations of interest from stalwarts of traditional investing, such as Paul Tudor Jones and Renaissance Technologies.”
2021 was a big year for institutional investment in the crypto world, especially in trading markets focused around Bitcoin and Ethereum. Some speculate retail and institutional crypto investors are also typically ones interested in technology stocks. If the tech market goes into reverse, it’s easier for institutions to “liquidate their crypto positions especially with the 24/7 access to their capital than some other positions,” Prosper Trading Academy crypto educator Howard Greenberg remarks.
While May isn’t over yet, the month certainly looks like one where a convergence of factors, from TerraUSD and Terra Luna’s price slides, to continued concern in the traditional stock market, have been a double-edged blow to the wider cryptocurrency world.
Hopes are as the virtual currency market matures it will become more resilient amid economic uncertainty and volatility.
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