Three things are driving the latest crypto pullback

    24 Feb 2022

    Bitcoin (BTC) and other major cryptocurrencies have tracked the volatility and broader market declines seen so far in 2022. But the pressure could be short-lived, according to at least one pundit, with a handful of temporary factors driving the latest pullback for digital currencies.

    “It always is uncomfortable when the market goes down, but I think we’re actually setting up for an extraordinarily strong second half of the year,” Matt Hougan, chief investment officer of Bitwise Asset Management, told Yahoo Finance Live on Tuesday.

    “The current pullback is being driven by three things, which are going to resolve. One, of course, is the broad market shift to a risk-off market. That’s pushing through all sorts of risk assets, of which crypto is one,” he said. “I think we’re most of the way there to adjusting to this new reality.”

    “The second piece is Biden’s executive order on crypto, which is coming out this week. I think once we get past that, that’ll be a relief,” Hougan added. Last week, Yahoo Finance reported Biden was poised to issue an order directing agencies to study cryptocurrencies and develop a government-wide strategy for crypto regulation.

    “And then [there’s been] some tax-related selling,” Hougan added. “So I think there are short-term hurdles in front of us. But as I look at the underlying trends, I’m extremely bullish about where we end up by the end of this year.”

    Prices for Bitcoin, the largest cryptocurrency by market capitalization, slumped below $40,000 this past weekend as tensions between Russia and Ukraine escalated further and prospects of a full military invasion increased. While prices rose Wednesday, they have trended lower so far throughout 2022. At the beginning of the year, Bitcoin was trading just below $48,000, according to Yahoo Finance data. Prices had topped $68,000 at all-time highs in November.

    Other major cryptocurrencies have also come under pressure. Ethereum (ETH), the second-largest cryptocurrency, has seen prices steady well below $3,000 after beginning 2022 above $3,700. Prices for altcoins including Cardano (ADA) and Solana (SOL) have also been pressured year-to-date.

    ‘New all-time highs are in sight’

    While Hougan declined to offer a specific price target for Bitcoin this year, he sees prices rebounding from current levels.

    “I think we are going to go substantially higher. I wouldn’t be surprised to see us challenge and even surpass the previous all-times highs, as long as things break along positive lines,” Hougan said.

    “Examples of what that would mean: if we get a Bitcoin ETF-approved, if we see reasonable regulatory outcomes out of Washington D.C., and if we get broader continued positive trends in terms of institutional adoption of crypto,” he added. “I certainly think new all-time highs are in sight by the end of the year if we see those kinds of things.”

    Hougan also addressed the recently firming relationship between price movements in Bitcoin and US equities, and especially US technology stocks. According to Bloomberg data, the correlation between Bitcoin and the Nasdaq 100 index was hovering around 0.43 recently, with a reading of 1 indicating a perfect positive correlation in movements. And as this correlation to technology stocks increased, the correlation between Bitcoin’s price movements and the safe haven asset gold deteriorated. While Bitcoin prices fell below $40,000, gold futures (GC=F) jumped above $1,900 for their highest level since June this week.

    “The thing about crypto, which investors are learning, is that crypto-assets are driven by two factors. One, they are risk assets. So when you have a risk-off trend in the market, they can fall out of favor from a short-term perspective,” Hougan added. “There’s also the crypto-specific drivers, right? Those sorts of fundamental characteristics, which I spoke about earlier – institutional adoption, positive regulatory developments, technological advances.”

    “In short periods of time, that risk-off sentiment can overwhelm those secular trends. And that’s what we’re seeing right now,” he added. “That’s what we saw in March of 2020 when it sold off at the start of the pandemic. The important thing for investors to remember is that those long-term trends are exactly that: They’re long-term trends, and they’re extremely powerful. So over meaningful periods of time, the correlation of crypto to other stocks and other risk assets is very low.”

    “It’s just during these short risk-off periods that you can see this correlation bounce to 1,” Hougan said. “The message for investors and what we emphasize at Bitwise is that means you need to hold for the long-term and even think about these pullbacks as opportunities to establish new positions.”

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