Making sense of market moves
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If you think the stock market had a crazy week, just wait until you hear about what’s going on with bitcoin.
Bitcoin’s selloff began last weekend when the cryptocurrency dropped 20%, plummeting from over $60,000 on August 3 to below $50,000 by August 5, its lowest price since February of this year. The drop coincided with a widespread market meltdown, largely due to fear of a US recession, Japan’s index plunging, and geopolitical instability in the Middle East.
Then, the digital asset recovered by the end of last week, rising back above $61,000 last Thursday—before dropping again over the weekend and this morning.
Right now, Bitcoin’s sitting at about $59,000.
The wild price fluctuations are a stark reminder that cryptocurrency tends to roughly correspond with equity markets, even though many have argued that bitcoin is a hedge against volatility elsewhere in the market.
“Sharp market pullbacks can feed on themselves in crypto, creating a downward cycle that needs to exhaust itself before we bottom. That's because, as prices drop, leveraged traders face margin calls and are forced to sell,” wrote Matt Hougan, CIO of Bitwise, in a note last week.
Is the drop a buying opportunity?
Don’t expect crypto prices to stabilize anytime soon (or ever, some would argue).
“The market is so fragile right now that any hint of selling pressure leads to multiples of actual selling ahead of the forced selling,” wrote Jeff Dorman, chief investment officer at Arca, last week.
But some analysts argue that even though crypto is volatile, the recent selloff had more to do with external economic factors—and that if you’re a long-term believer in cryptocurrency, you shouldn’t back out now.
“If you were ever bullish on the market, there’s no reason you should be less bullish today after this week’s events,” Dorman wrote last week. In a note today, he called the market drop last week, “One of the dumbest sell-offs in history, certainly in terms of magnitude, as it was entirely technically driven.”
The bottom line? Crypto is a speculative asset, and most financial experts agree it shouldn’t comprise more than 5% of your portfolio. This past week’s ups and downs weren’t enough to spook many bitcoin bulls, but if you decide to jump into crypto investing, be ready for a wild ride. —LB