Despite many claims that cryptocurrencies could act as hedges against a downturn in the overall market, they’ve gone down along with the overall market, except the fall started sooner and has been steeper.
So great was the fall that several large crypto lending platforms could not continue operations and declared bankruptcy. After offering sky-high returns on crypto deposits, the subsequent cratering of crypto prices made those loans impossible to pay. The companies responded by suspending all activity on their platforms.
The government does not protect these platforms, so investors had no recourse as they suddenly watched billions of dollars disappear. This possibility (inevitability?) was foreseen by the companies, who were sure to include disclaimers that investors would not receive their money back in the event of bankruptcy.
These events resulted in what seems like an all-time low in sentiment among crypto investors. Bitcoin (BTC) dropped 72% from its peak, and Ethereum (ETH) dropped 79%. The turmoil keeps new entrants to the industry away, leaving only the most fervent believers and those unwilling to take a loss holding the bag.
Over the last few weeks, there’s been an uptick in the overall market. Gas prices have been coming down, and there’s less certainty that the Federal Reserve will make more large rate increases. This positive sentiment appears to be affecting the crypto market, with Bitcoin up 20% and Ethereum up 50% from their recent lows.
The S&P 500 was up 11% over the same period. It appears that, rather than being a hedge against a bear market, crypto will go in the same direction as the overall market but with more volatility. The highs may be higher, but the lows will definitely be lower. Investors should be willing to accept a large amount of risk with cryptocurrencies, but for now, they appear to be on the upswing.
Bitcoin (BTC) is currently changing hands at $21,111.77, up +0.61% on the day. YTD BTC is down -54.42%.
Ethereum (ETH) is currently trading at $1,408.11, up +2% on the day. YTD ETH is down -61.82%.
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Disclaimer: Wealthy VC does not hold a position in any of the stocks mentioned in this article.