Crypto proceeds where 2021 ends
Summary: The crypto market has been off to a rough start this year, effectively starting the year where it ended in 2021. We are looking at multiple sources to answer the question of why.
On 10 November, the crypto market hit an all-time high in terms of the combined market capitalization of close to $3trn, according to TradingView. Fast forward, the remainder of 2021 was surrounded by fatigue in the crypto market, leading to high volatility alongside similar declines in particular technology and bubble stocks.
Close to 7 days into the new year, the crypto market has so far shown a similar path to where it ended 2021. From its all-time high in November of 69,000 (BTCUSD), Bitcoin declined to the price on 46,200 at New Year’s Eve before further declining to its current level of 42,200. Respecting price actions, Ethereum has followed in the footsteps of Bitcoin. At the same time as Bitcoin, Ethereum hit an all-time high of around 4,850 (ETHUSD) in November. The delight was somewhat short as Ethereum celebrated New Year at 3,750 before declining to its current level of 3,230.
The question remains why the arguably positive market sentiment turned negative after November while it has continued into the new year. To find the answer, we must turn our attention to multiple sources.
First of all, 2021 was a great year for the crypto market. With gains magnified many times for about every involved in the space, profits must be realized at some point. Substantial profit realization in a highly leveraged market can quickly turn it around as traders are getting their long positions liquidated, thus making the downside worse. Looking at funding rates for crypto perpetual futures, they have arguably stabilized since November, meaning there is now a more reasonable distribution of longs versus shorts, whereas longs previously dominated the futures.
Correlated to speculative stocks
Last year was also good in terms of equities. In December, though, the equity market experienced a steep selling pressure with particularly technology and bubble stocks tumbling. These stocks have historically been partially correlated to crypto, and by all means, it shows an altered risk appetite without any doubt impacting the highly speculative crypto market. We know that individuals trading cryptocurrencies are often drawn into meme stocks or other highly speculative stocks like GameStop as well. This effectively results in similar price movements, so when one goes down, the other likely follows.
The rate hike is likely coming
On top of this, the market has started to expect a possible rate hike. This expectation was further boosted yesterday after the United States Federal Reserve released the minutes of its December meeting, which shows that the FED wants to accelerate the rate hike. This has caused uncertainties for crypto traders on the matter by what means the increased interest rate will impact the market, comparable to its impact on technology stocks. Our Head of Equity Strategy, Peter Garnry, wrote an article yesterday covering the topic of interest rate and technology stocks. The same will likely be the case with the crypto market.
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