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Cryptocurrencies have decoupled with tech stocks as a rebound in all manner of equities has seen no such similar move for the digital asset class.
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Cryptocurrencies may have further to fall as the fallout from the TerraUSD collapse continues to ripple through the decentralized finance or DeFi sector, hitting Solana, Avalanche, Polkadot and Ether particularly hard.
In 2018, when cryptocurrency prices tanked, the malaise was confined largely to the digital asset sector, with little (if any) correlation with what was going on in financial markets.
Since then however, growing institutional participation in cryptocurrencies has seen correlations between the digital asset class and major indices like the Nasdaq 100 and S&P 500 stronger than at any point in history.
Until fairly recently, cryptocurrencies moved practically in lockstep with tech stocks, with rolling 30-day correlations between Bitcoin and the Nasdaq 100 hitting as high as 0.76 at one stage (a correlation of 1 means that two assets move in the same direction and magnitude).
Cryptocurrency investors have been hoping for a decoupling for the longest time, so that the malaise in financial markets wouldn’t take Bitcoin and other cryptocurrencies down with them.
But investors should be careful what they wish for, they just might get it.
In an ironic twist, cryptocurrencies have been stuffed with all of the fat and none of the flavor as last week, even with everything else in financial markets rebounding, cryptocurrencies continued to bleed.
The benchmark cryptocurrency Bitcoin led a broad decline across the entire cryptocurrency spectrum, marking its eight straight weekly loss in its longest such slump since August 2011.
In May alone, cryptocurrencies have lost a whopping US$500 billion in market cap.
Last Friday marked the second straight day that cryptocurrencies declined even as tech stocks and other speculative corners of the financial market rallied – a sign of shaky conviction in the sector that may portend a worrisome trend.
Could cryptocurrencies have gotten ahead of themselves?
In the aftermath of the dotcom bubble bursting in 2001, many once high-flying tech stocks never recovered after their Superbowl moment.
Cryptocurrencies also had their Superbowl moment when some of the world’s largest exchanges advertised during the coveted advertising slots and it’s entirely possible that what investors are witnessing is the decline of some cryptocurrencies never to be revived.
Most badly hit have been cryptocurrencies closely associated with decentralized finance or DeFi, especially Ether, Solana, Avalanche and Polkadot, as sentiment towards the sector cooled in the aftermath of the TerraUSD collapse.
Decoupling is great when it works in an asset’s favor, but it would be unfortunate if the only time cryptocurrencies show a strong correlation with tech stocks is on the way down.
