The crypto market is still in freefall. Crypto’s total value sunk by a further $20bn since our last market report. Overall the market is now down to 14-month lows with every chance of going lower. Even some long-term crypto investors are resigning their positions and exiting the market.
But the cryptocurrency market isn’t the only one having a bad week. The NASDAQ 100, which principally tracks tech share movements, is also down. The index took its first hit in mid-October – which may also have affected crypto markets – and then again at the beginning of this week.
These tandem movements highlight that the causes behind this week’s crypto market wipeout go beyond the sector. Like cryptocurrencies, tech stocks are often viewed as high-risk assets, says Mati Greenspan, the senior market analyst at eToro, a crypto trading platform. Concerns over a slowdown in a decade-long equity bull-run, and fears over a potential global recession next year, are likely leading some portfolios to divest out of riskier holdings.
What is affecting the NASDAQ seems to be having a knock-on effect on cryptocurrencies. “Crypto was considered a safe haven once but in the past few years, it correlated with the stock market,” said Alon Rajic, CEO of MoneyTransferComparison.com. “The reason for the sell-off is the US stock market sell-off, nothing less, nothing more.”
These are, of course, at different scales. Whereas the NASDAQ is down by roughly 3% from where it closed on Friday, the crypto market has fallen down by 20%. “The only difference between the two is that the crypto sell-off is a lot more extreme,” Rajic added. “Hence, another 10% drop on Nasdaq, which is merely a market correction where we stand, will probably send cryptocurrency back into oblivion.”
Crypto market: are there other causes?
There are other likely causes as well. One of them is an overreaction to the SEC’s decision on Friday, mandating two ICO projects – Paragon and Airfox – to reimburse investors. To some extent this was no surprise: Paragon is a notoriously controversial project, to the point that cryptocurrency subreddit /r/cryptocurrency actually bans posts on the project over concerns that it’ll bring the sector (and the forum) into disrepute.
News involving the SEC always provokes strong market reactions, whether bullish or bearish. Their decision to postpone the Bitcoin ETF ruling wiped $100bn from the market in less than a week. A bullish congressional hearing in early February, where the SEC gave testimony, was the catalyst behind a $250bn boomerang up.
It’s impossible to precisely measure the impact of the SEC ruling, as it coincided with the Bitcoin Cash (BCH) fork last Thursday. Some sources suggest it caused a run on Bitcoin (BTC), which makes up more than half of the crypto market. Both sides may have liquidated their BTC holdings in order to continue the BCH hash war.
Similarly, the market had already been on a downward trajectory in the immediate run-up to the fork. The fact that there was no clear winner, and that both sides vowed to carry on the fight, possibly for months, may have led to a significant divestment out of cryptocurrency.
Investors may have decided to move out, so as not to be exposed to high volatility for the foreseeable future.
The author is invested in BTC, which is mentioned in this article.