Ethereum, Bitcoin, Dogecoin Surge, which leads to questions about whether the bottom is in
What happened
Among the megacap cryptocurrencies, Ethereum (ETH 5.50%) and Bitcoin (BTC 1.14%) are often seen as bellwethers indicating market day-to-day and week-to-week performance. Starting at. 11:45 ET, these top tokens have risen by 8.7% and 2.8% respectively in the last 24 hours.
Popular meme token Dogecoin (DOGE 1.68%), which is often seen as a measure of the sentiment of retail investors, also had strong results today. This dog-inspired symbol increased by 3.9% over the same period. These moves have led investors to question whether the bottom can be in the crypto sector, or whether this is fair one bottom in a bear market with more space to run.
The movements of these top-class cryptocurrencies today seem to be primarily driven by macro forces, once again. Yesterday, Federal Reserve Governor Christopher Waller called for an interest rate increase of 75 basis points (0.75%) this coming meeting. Many had called for an increase of a full percentage point.
In addition, the ongoing saga which is the announced bankruptcy of the crypto lender Celsius this week has created significant volatility in this market. However, investors seem to be of the opinion that the potential contagion from such errors can be limited, which increases valuation across the sector.
So what
The widespread thesis many crypto investors held not so long ago was that cryptocurrencies such as Bitcoin, Ethereum and even Dogecoin are assets with a low correlation to equities. Cathie Wood has famously (or notoriously) taken this position in the past, signaling that these assets are separated from the macro drivers of equities, making them inherently better investments for growth investors looking for long-term risk-adjusted returns.
That task sounded good, but the decade-long beef market we all enjoyed is over. Investors are now struggling with the reality that macroeconomic forces that strengthened both equities and cryptocurrencies (accommodative monetary policy) are now seeing a strong transition to a very hawkish policy. Less simple money flowing into high-risk assets means lower valuations, whether investors like it or not.
Compound concerns for crypto investors are concerns about high-profile errors in the crypto area recently. Whether we are talking about Terra, hedge fund Three Arrows Capital, or Celsius, there is now a risk of infection specifically for the crypto sector. Although concerns may subside somewhat today, this is something investors need to see.
What now
These daily movements we have seen in the last week in the crypto area are not out of the ordinary. This is a volatile asset class and will most likely remain so. In fact, it is very difficult to value digital currencies without inherent cash flows and get basic calculations to do so. When we include rapidly changing macro factors and risk of infection in the equation, the valuation process becomes even more difficult.
Thus the question of whether we have hit the bottom or one the bottom will probably only be determined in retrospect. Today, crypto investors have a trace of bullish sentiment to hold on to. Let’s just see if this lasts.
