The spread of pain in cryptocurrencies due to the fall of FTX is that it has weakened its relationship with other risk assets, a sign that Bitcoin’s influence on investors may be waning.
Spreads hurt cryptocurrencies as the fall of Sam Bankman-Fried’s FTX weakened its relationship with other risk assets, a sign that Bitcoin’s influence on global investors may be waning.
The idea that Bitcoin is an important part of a diversified portfolio of risk assets, with huge losses caused by the revelation that even FTX, until now considered one of the best blue chip names in crypto, is not appropriate. That’s a far cry from earlier this year, when Bridgewater estimated that 5% of Bitcoin was held by institutional-level investors.
Bitcoin fell 23% last week, its worst fall since June, and last traded at about $15,879. The S&P 500 index rose 5.9% in its best gain since June. The correlation between the past two weeks fell to its lowest level this year, based on a 20-day study. The performance gap between Bitcoin and the Nasdaq has been the largest since 2020.
“The idea of using crypto as a high-beta play at risk has disappeared, because there are easier ways to play elsewhere that don’t suffer the same systemic risk,” said Chris Weston, head of research at Pepperstone Group. “It’s a structural issue, about the actual architecture of the crypto system and the trust it can have. Who’s next is the question on many people’s lips.
The latest crypto losses come as investors have had a taste of the space and as price declines reduce the virtual currency’s footprint. The total market value of all tokens has fallen by more than 70% from a record peak of just under $3 trillion set a year ago, according to the CoinGecko website.
The current price of $843 billion as estimated by the tracker is now less than 1% of the world equity market. Stocks fell 16% over the period, but a resurgence in broad risk appetite, fueled by hopes for a slower rate hike by the central bank, has sent equities down more than $13 trillion since the October 12 decline.
The stark contrast between sliding cryptocurrencies and ebullient stocks underscores how fast the turnaround has been for an asset class that nearly won over mainstream investors less than a year ago.
Back in 2021, JPMorgan Chase & Co. strategist Nikolaos Panigirtzoglou wrote Bitcoin could theoretically reach $146,000 in the long term at the expense of gold — last week he said the current upheaval could send it to $13,000. A PWC survey in April found that 42% of crypto hedge funds predicted Bitcoin would trade between $75,000 and $100,000 by the end of 2022.