The Cryptocurrency Crisis Continues With Another Plunge in Bitcoin, Ethereum and XRP Today

The day promises to be once again very bad in the world of crypto-currencies. Most major tokens were trending lower, led by bitcoin (BTC 0.44%), which lost 5.3% in the past 24 hours.

The largest cryptocurrency 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 around $19,200.

Things are not looking much better for the large cap tokens Ethereum (ETH 0.64%) and XRP (XRP 0.63%). These two tokens were down 5.8% and 9%, respectively, in the last 24 hours.

It seems that macroeconomic factors continue to drive negative sentiments towards cryptocurrencies. The most notable development in the past 24 hours has been a change in the 10-year US Treasury yield. This key bond, which impacts the pricing models of most risky assets and provides the benchmark lending rate for many debt instruments, exceeded the 4% threshold for the first time since 2008. Generally speaking, rising bond yields “without risk” bodes ill for risky assets. When investors can earn better returns through less risky alternatives, some choose to do so, which has the effect of withdrawing funds that could have been invested in these riskier assets. Also, investors tend to demand higher anticipated 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 traded in high correlation. Morning declines in all major indices, but in particular the Nasdaq, were mirrored by falling prices of risky assets such as cryptocurrencies on Wednesday morning.

There aren’t really any token-specific forces at work in Wednesday’s sector decline. And as some investors clung to past catalysts, bullish sentiment for cryptocurrencies appears to have eroded.

It makes sense that correlations between stocks and cryptocurrencies have increased as cryptocurrency investing has become 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 risk level of their portfolios, bonds may seem like a much more attractive short-term asset.

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 investors have seen on stocks like Bitcoin, Ethereum, and XRP are remarkable. Therefore, when this market does eventually turn 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 spring 2021 dip was followed by a strong V-shaped recovery. This recovery ended in December. That rebound ended in December, but many are still hoping for a similar outcome after the even steeper fall 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 cryptocurrency market could see even more downside volatility.

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