Bitcoin caught in market headwinds: can it break away?

As the mainstream market mayhem continues, Bitcoin and its fellow cryptocurrencies continue to be buffeted by waves of uncertainty and economic pessimism. But wait! Wasn’t it just over six months ago that crypto fever struck main street? Didn’t institutional investors jump in with both feet? Then why, in the doom and gloom of today’s headlines, why is crypto taking the hit?

“Bitcoin has been falling along with Nasdaq, a benchmark that’s weighted toward technology stocks, making an investment in cryptocurrency just as risky as any other tech stock,” The New York Times reports. “The crash drives home an unpleasant reality for investors — that an asset they hoped would be transformative has not fulfilled its promise.”

Higher interest rates and the war in Ukraine have contributed to the fallout in both traditional markets and the digital currency world, The Times noted.

National Public Radio summarized the situation. “Put simply, cryptocurrencies got caught up in the maelstrom affecting broader markets. Stocks, bonds, and other assets have tumbled in recent weeks as investors fear the Federal Reserve will need to raise interest rates aggressively to fight inflation, raising the prospect of a recession.”

This correlation to the mainstream markets is testing the theory of Bitcoin as a hedge against inflation.

“I think it (Bitcoin) will continue to trade with the equity market and risk assets,” said David Donabedian, chief investment officer of CIBC Private Wealth Management, said in a Bloomberg interview. “That’s the big lie that’s been exposed, the idea that it’s some new asset class that’s going to help diversify your portfolio has been blown to smithereens.”

Sam Bankman-Fried, founder of FTX, contributed to the pot stirring about Bitcoin last week when he was quoted by the Financial Times as saying, “the bitcoin network is not a payments network and it is not a scaling network.” The comment ricocheted off mainstream news media outlets and social media where Bankman-Fried was quick to point out that he was referring to the scalability of the Bitcoin blockchain.

“To be clear I also said that it _does_ have potential as a store of value,” he tweeted Monday. “The BTC network can’t sustain thousands/millions of TPS (transactions per second) although BTC can be xfered on lightning/L2s/etc.”

But as the price of Bitcoin plummeted to near $25K and slowly made its way back up to $30K Tuesday, traders that are HODling have good reason to stay the course.

“One difference between the current environment and other prolonged downturns such as the “crypto winter” in 2018 is the amount of institutions now involved in the market, which may be a source of support,” Paul Veradittakit, an partner at digital asset manager Pantera Capital, said in a Bloomberg interview.

“Compared to 2018, there are more institutional investors with exposure to crypto and most see this as a buying opportunity.”

TerraUSD’s meltdown: will new regulation quickly follow?

Not helping the Bitcoin situation was the massive meltdown of stablecoin TerraUSD. The third-largest stablecoin was unpegged from the U.S. Dollar, which caused the collapse of its price along with reserve asset LUNA. Adding to the controversy was a move by the Luna Foundation Guard to sell off $3 billion in Bitcoin as it tried to shore up LUNA’s price.

Social media lit up as the losses mounted, and some questioned if LFG’s sell off was a way to support whales as their assets plunged.

“There was never any deal for any “insiders” to exit,” LFG tweeted. “LFG funds were merely used squarely within its mandate to help protect UST peg.”

What’s done is done. But the widespread losses may have even more impact on the market as the spotlight once again shines on regulation. Circle CEO Jeremy Allaire, told Yahoo Finance the collapse could prompt regulators to move fast to wrap some stronger rails around crypto.

“When you have a major blowup, it’s certainly going to accelerate the need for Congress to act and establish some perimeters around who and what is involved in operating a dollar stablecoin in the United States of America,” Allaire told Yahoo Finance.

Analysts agree.

“As the Terra blowup prompts more stringent regulation of crypto in general and stablecoins in particular, we believe that more secure and conservative blockchains like Bitcoin and Ethereum will continue to gain market share in the crypto market ecosystem,” the Ark Newsletter said.

On-chain analysts at Glassnode also concluded that the stablecoin situation will have far-reaching implications for Bitcoin and all cryptocurrencies.

“As stablecoins become increasingly integrated as base layer infrastructure in the market, the shockwaves of a de-pegging event, especially in the largest stablecoin USDT will have widespread impacts,” Glassnode concluded in its weekly report. “The double momentum from UST and USDT depegging, some $40B in LUNA/UST value destroyed, and with LFG adding 80k BTC sell-pressure created a perfect storm. This event will also no doubt attract the regulatory spotlight at a greater pace and urgency.”

Which brings us back to Bitcoin, which remains caught up in crosswinds it can’t control. However, the world’s first digital currency remains steadfast in its dominance of the crypto market.

“After a rapid dump of 3 billion dollars worth of #Bitcoin onto the market, its price stands at $30,000,” @real_vijay tweeted. “This, friends is what the path to hyperbitcoinization (sic) looks like. Not even gold would show this kind of resilience.”

Joyce Pavia Hanson

Contributor

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