Rising interest rates amid slowing growth have turned investors away from riskier assets, including bitcoin, which has plunged to a one-year low.
Bitcoin fell to levels not seen since July last year, falling below $33,000. Meanwhile, Ethereum was also trading below $2,390, a low not seen since last February.
This sentiment was also reflected in more crypto markets, whose total market capitalization fell 4.6% on the previous day to $1.6 trillion.
According to Matt Dibb, COO of Singapore-based crypto platform Stack Funds, this route was held over the weekend partly due to the crypto market’s notoriously low liquidity.
Investors still consider crypto ‘risky’
“I think everything within crypto is still classified as a risk asset, and most cryptocurrencies are being outclassed as we have seen with the Nasdaq,” he said.
While bonds and stocks globally are down 10% this year, bitcoin’s 27% drop is in line with the tech-heavy Nasdaq’s 22%.
The correlation between bitcoin and riskier assets such as tech stocks has soared to record levels this year, undermining the argument that bitcoin can be used as a hedge against inflation.
While rising inflation has prompted the US Federal Reserve to raise interest rates, growth is still limited by pandemic-hit supply chains, not to mention Russia’s invasion of Ukraine.
These factors, apart from eroding liquidity and slumping equity markets, have hurt the outlook for more speculative assets, including crypto, in the short term.
“The downside is likely to continue for the next few days,” said Edul Patel, CEO of algorithmic-based crypto investment platform Mudrex, who believes that bitcoin could test the $30,000 level.
Tera stablecoin is losing the peg
Another immediate impact on this weekend’s slide was the algorithmic stablecoin Terra UST (UST) which was briefly losing its peg to the dollar. The new way Terraform Labs maintains PEG was questioned, which may have contributed to the slide.
However, plans to build $10 billion worth of bitcoin reserves to support the stablecoin mean that volatility in UST could potentially spread to bitcoin markets.
While the stablecoin recovered, the price of TerraForm Labs’ cryptocurrency LUNA fell nearly 25% over the weekend.