Crypto crash continues as Bitcoin, Ethereum and XRP plunge again today

What happened

It looks like it’s going to be another ugly day in the crypto world. Starting at. 09:30 ET Wednesday, most major tokens were lower, led by Bitcoin (BTC 0.76%), which had fallen 5.3% in the past 24 hours. The world’s largest cryptocurrency by market capitalization was trading above the $20,000 level at this point on Tuesday morning. But an industry-wide selloff sent it below $18,500 late in the day. At the time of writing, the token was changing hands near $19,100.

Things aren’t much better for large-cap tokens Ethereum (ETH 3.28%) and XRP (XRP). These two tokens declined by 5.8% and 9% respectively in the last 24 hours, as of 9:30 a.m. ET.

It appears that macroeconomic factors continue to drive negative sentiment regarding cryptocurrencies. The most notable development over the past 24 hours was an overnight shift in the yield on the US 10-year Treasury note. This key bond, which affects the valuation models of most risk assets and provides the benchmark lending rate for many debt instruments, rose above the 4% threshold for the first time since 2008. In general, higher yields on “risk-free” bonds bode poorly for risk assets. When investors can obtain more attractive returns from lower-risk alternatives, some choose them, drawing funds away from them that might otherwise have gone into the riskier assets. In addition, investors tend to demand higher expected returns on their risky investments when they have a wider range of good alternatives to choose from.

As has often been the case recently, stocks and crypto traded with high correlation. Early morning declines across all major indexes, but esp Nasdaqwas reflected by falling prices of risky assets such as cryptocurrencies on Wednesday morning.

So what

There aren’t really many token-specific forces at work in Wednesday’s sector-wide decline. And while some investors clung to past catalysts like The Merge in their search for reasons to load up on higher-growth digital tokens, bullish sentiment for crypto appears to have eroded.

It makes sense that the correlations between stocks and cryptos have increased as crypto investing has become more mainstream. Those who buy crypto (especially institutional investors) are also invested in stocks. In times like these, when many investors want to reduce the level of risk in their portfolios, bonds can seem like a much more attractive asset in the short term.

What now

Over the long term, cryptocurrencies have shown their value as high-growth assets that can amplify returns in bull markets. Coming off one of the longest bull markets in history, the returns investors have seen in the likes of Bitcoin, Ethereum and XRP are remarkable. Consequently, when this market eventually turns, this is an asset class I think is worth keeping an eye on.

That said, the question many are asking right now is when will this bear market end. The fall in spring 2021 was followed by a sharp V-shaped recovery. That rally ended in December, but many are still hoping for a similar outcome after the even steeper fall that has occurred in 2022. That said, given the inflationary pressures in the economy, bond investors don’t seem to expect such a sharp turn in monetary policy. Consequently, the crypto market could be in for even more downside volatility.