Friday’s crash wipes out over $1 trillion off the crypto market

Bitcoin lost as much as 8.7% Friday and dropped below $38,000 to its lowest level in 6 months. After the Federal Reserve signals its intention to withdraw stimulus from the market, riskier assets like cryptocurrencies have suffered.

Since its peak in November, the largest digital asset has lost 40% of its value. Other cryptocurrencies have suffered even more, with Ether and meme coins mired in similar drawdowns.

As Bloomberg reports, Bitcoin’s decline since that November high has wiped out more than $570 billion in market value, and roughly $1.17 trillion has been lost from the aggregate crypto market.

According to Bespoke Investment Group, while there have been much larger percentage drawdowns for both Bitcoin and the aggregate market, this marks the second-largest ever decline in dollar terms for both.

“It gives an idea of the scale of value destruction that percentage declines can mask,” Bespoke analysts said. “Crypto is, of course, vulnerable to these sorts of sell-offs given its naturally higher volatility historically, but given how large market caps have gotten, the volatility is worth thinking about both in raw dollar terms as well as in percentage terms.”

With the Fed’s intentions rocking both cryptocurrencies and stocks, a dominant theme has emerged in the digital-asset space: cryptos have twisted and turned in nearly precisely the same way as equities have.

“Crypto is reacting to the same kind of dynamics that are weighing on risk-assets globally,” said Stephane Ouellette, CEO and co-founder of institutional crypto-platform FRNT Financial. “Unfortunately for some of the mature projects like BTC, there is so much cross-correlation within the crypto asset class it’s almost a certainty that it falls, at least temporarily in a broader altcoin valuation contraction.”

Crypto-centric stocks also dropped on Friday. For example, Bloomberg data show that Coinbase Global Inc. at one point lost nearly 16% and fell to its lowest level since its public debut in the spring of 2021.

Antoni Trenchev, Nexo co-founder and managing partner, cites Bitcoin’s correlation to the tech-heavy Nasdaq 100, which right now is near the highest in a decade.

“Bitcoin is being battered by a wave of risk-off sentiment. For further cues, keep an eye on traditional markets,” he said. “Fear and unease among investors is palpable.”

Noteworthy is the correlation between Bitcoin and Cathie Wood’s ARK Innovation ETF (ticker ARKK), a pandemic sample of speculative risk-taking. That correlation stands at around 60% year-to-date, versus about 14% for the price of gold, according to Katie Stockton, founder and managing partner of Fairlead Strategies, a research firm focused on technical analysis. It’s “reminding us to categorize Bitcoin and altcoins as risk assets rather than safe havens,” she said.

Meantime, data from crypto futures trading platform Coinglass reads that more than 239,000 traders had their positions closed over the past 24 hours, with liquidations totaling roughly $874 million.

Though liquidations have spiked, the numbers are relatively muted compared to previous declines, according to Noelle Acheson, head of market insights at Genesis Global Trading. Acheson points out that Bitcoin’s one-week skew, which compares the cost of bearish options to bullish ones, spiked to almost 15% on Wednesday compared to an average of about 6% in the past seven days.

“This flagged a jump in bearish sentiment, in line with overall market jitters given the current macro uncertainty,” she said.

Kara Murphy, chief investment officer at Kestra Investment Management, said cryptocurrencies have a life of their own but that the recent slump is rational.

“It makes sense as people start to retrench a little bit, look for something that’s a little bit more solid, they’re gonna move away from crypto,” she said. “On the margin, with folks becoming more risk-averse, crypto will suffer from that.”

Aside from the US Fed’s inflation measures and the crypto market’s growing correlation with Wall Street, analysts suggest another cause of the recent crash is a crypto ban proposed by the Russian central bank (CBR). In a recent report, the CBR demanded a blanket ban on crypto mining and trading in Russia. The central bank also warned crypto could pose a risk to the financial sovereignty of the nation.

As Russia became the third largest Bitcoin mining hub, which houses roughly 10% of global Bitcoin mining activities, many believe the central bank’s demand for a blanket ban could have triggered a May 2021-like fear in the market, leading to sell-off.

Last year, a proclamation by China a similar ban sparked a significant sell-off because it had been seen as a major regulatory move that affected a lot of mining operations and posed outright antagonism toward cryptocurrencies.