More than $1 trillion lost due to the cryptocurrency crash

Recently, there’s been only one constant for Bitcoin: drop after decline after decline. And the superlatives have been piling up fast.

Riskier assets throughout the world have slumped as the US Federal Reserve (Fed) prepares to remove support from the market. Bitcoin, the most valuable digital asset, fell more than 12% on Friday (Jan 21), reaching a low of US$36,000 (about RM150,714), its lowest level since July. It has dropped approximately 45 percent of its value since its high in November. Other digital currencies, such as Ether and meme coins, have suffered just as much, if not more, losses.

Since that November peak, Bitcoin has lost more than US$600 billion in market value, and the total crypto market has lost more than US$1 trillion. According to Bespoke Investment Group, this is the second-largest ever fall in dollar terms for both Bitcoin and the aggregate market, despite considerably higher percentage declines.

In a note, Bespoke analysts noted, “It gives a notion of the scale of value loss that percentage falls can disguise.” “Crypto is, of course, subject to these kind of sell-offs because to its historically higher volatility, but considering how enormous market caps have gotten, volatility is worth thinking about both in raw dollar terms and in percentage terms.”

With the Fed’s plans shaking both cryptocurrencies and stocks, a recurring narrative in the digital-asset world has emerged: cryptos have twisted and turned almost identically to equities.

“Crypto is reacting to the same kinds of trends that are weighing on risk assets around the world,” said Stephane Ouellette, CEO and co-founder of FRNT Financial, an institutional crypto-platform. “Unfortunately for some of the more established projects, like as BTC, there is so much cross-correlation within the crypto asset class that it’s practically a certainty that it will collapse, at least temporarily, in a broader alt-coin (alternative coin) price contraction.”

Crypto-related stocks also fell on Friday, with Coinbase Global Inc plunging about 16 percent and hitting its lowest level since going public in the spring of 2021, according to Bloomberg data.

MicroStrategy Inc fell 18 percent after the Securities and Exchange Commission stated that the company’s unofficial accounting measures cannot account for Bitcoin’s rapid movements. The enterprise software company’s Bitcoin holdings have basically turned its stock into a Bitcoin proxy.

According to persons familiar with the situation, the Biden administration is planning to announce an initial government-wide strategy for digital assets as soon as next month, tasked federal agencies with examining the risks and opportunities they present.

Nexo’s co-founder and managing partner Antoni Trenchev mentioned Bitcoin’s association to the tech-heavy Nasdaq 100, which is currently around its highest level in a decade.

“A tsunami of risk-off sentiment is battering Bitcoin. Keep a watch on traditional markets for more clues,” he advised. “There is a real sense of fear and discomfort among investors.”

Consider the link between Bitcoin and Cathie Wood’s ARK Innovation ETF (exchange-traded fund, ticker ARKK), a pandemic poster-child of speculative risk-taking. According to Katie Stockton, the founder and managing partner of Fairlead Strategies, a research organisation focused on technical analysis, the connection is over 60% year-to-date, compared to about 14% for the price of gold. She explained that it’s “reminding us to classify Bitcoin and altcoins as risk investments rather than safe havens”.

According to data from Coinglass, a cryptocurrency futures trading and information platform, approximately 239,000 traders had their positions cancelled in the last 24 hours, with liquidations totaling almost US$874 million.

According to Noelle Acheson, head of market insights at Genesis Global Trading, while liquidations have increased, the numbers are relatively low when compared to past falls. Bitcoin’s one-week skew, which compares the cost of bearish options to bullish options, rose to nearly 15% on Wednesday, compared to an average of approximately 6% in the previous seven days, according to Acheson.

“This signalled a shift in bearish sentiment, which is consistent with broader market worries given the current macro uncertainty,” she explained.

Cryptocurrencies have a life of their own, according to Kara Murphy, chief investment officer at Kestra Investment Management, but the recent slump is sensible.

“It makes sense when people start to retrench a little bit and look for something a little bit more substantial, [and] they’re going to move away from crypto,” she explained. “On the edge, as people become more risk apprehensive, cryptocurrency will suffer.”