It’s shaping up to be another very bad day in the crypto-currency world. Most of the major tokens were trending lower, led by bitcoin (BTC 0.44%), which had lost 5.3% over the past 24 hours.
The largest crypto-currency by market capitalization was trading above the $20,000 level . But a sector sell-off sent it below $18,500 by the end of the day. At the time of writing, the token was changing hands at around $19,200.
Things aren’t much better for the large-cap tokens Ethereum (ETH 0.64%) and XRP (XRP 0.63%). Both tokens were down 5.8% and 9%, respectively, over the past 24 hours.
It appears that macroeconomic factors continue to drive negative sentiment toward cryptocurrencies. The most notable development over the past 24 hours has been a change in the yield on the 10-year U.S. Treasury. This key bond, which impacts the valuation models of most risk assets and provides the benchmark lending rate for many debt instruments, exceeded the 4% threshold for the first time since 2008. In general, the rise in bond yields “risk-free” bodes ill for risky assets. When investors can earn better returns from less risky alternatives, some choose to do so, thereby withdrawing funds that could have been invested in these riskier assets. In addition, investors tend to demand higher expected returns on their risky investments when they have a wider range of good alternatives.
As has often been the case of late, stocks and crypto were trading in high correlation. Morning declines in all major indices, but particularly the Nasdaq, were mirrored by falling prices in risky assets such as cryptocurrencies on Wednesday morning.
There aren’t really any token-specific forces at work in Wednesday’s sectoral decline. And while some investors were clinging to earlier catalysts the bullish sentiment for crypto-currencies seems to have eroded.
It makes sense that correlations between stocks and crypto-currencies have increased as crypto-currency investing becomes more mainstream. Those who buy crypto (especially institutional investors) are also invested in stocks. In a time like this, when many investors are looking to reduce the level of risk in their portfolios, bonds may seem like a much more attractive asset in the short term.
Over the long term, cryptocurrencies have shown their value as high-growth assets that can amplify returns in bull markets. Coming out of one of the longest bull markets in history, the returns that investors have seen on the likes of Bitcoin, Ethereum and XRP are remarkable. Therefore, when this market eventually turns around, this is an asset class worth watching.
That said, the question many are asking right now is when this bear market will end. The plunge in the spring of 2021 was followed by a strong V-shaped rally. That rally ended in December. That rebound ended in December, but many are still hoping for a similar outcome after the even steeper drop that occurred in 2022. That said, given the inflationary pressures in the economy, bond investors don’t seem to expect such a sharp pivot in monetary policy. As a result, the crypto-currency market could see even more downward volatility.