Crypto Markets on the Edge of a Cliff. Is More Pain in Store?

In recent times, a lot has been made of the correlation between crypto assets and the US stock market. And indeed, irrespective of the fundamentals (which include Ethereum’s merge, Cardano’s “Vasil” upgrade, and two major updates to the Tezos blockchain titled “Tenderbake” and “Kathmandu”), crypto markets have not only followed the downward path of US stocks all year long, but in typical crypto, fashion has massively outdone them in terms of drawdown.

Since May 9, the S&P 500, Nasdaq 100, Dow Jones Industrial Average, and Russell 2000 are down 10.8%, 11.3%, 10.8%, and 7%, respectively. From that same date, BTC, ETH, ADA, and XTZ are down 38.9%, 39%, 29.5%, and 28.6%, respectively. And that’s just from May 9, at which point both US equities and crypto had already seen the bulk of their declines from their November 2021 to January 2022 peaks.

We take May 9 as our starting point because this was the Monday open after the Fed’s first 50 basis point rate hike, the largest of its kind since 2000. This hike marked the moment that the Federal Reserve let markets know it meant business. You can see this in the long weekly down wicks on all of the above symbols. Each would go on to recover some of those losses before the week’s close and then spend the next few months zig-zagging even lower.

But something interesting has been taking place recently. While US equities are currently breaking to new weekly lows, crypto markets appear to be trading in a range that for Bitcoin and Ether goes back to June, and for Tezos and ADA, goes all the way back to that May 9 crash. In fact, on May 9, ADA actually traded lower than its current price, reaching as low as $0.386. This has led many commentators to question whether crypto markets are in a process of bottoming-out.

So, is this a dip-buying opportunity or not? This is what everybody wants answered at the moment. Crypto investors have certainly gone through enough pain over the past year to be numb to it now, and you have to think that the speculative money has been washed out, since all but those who got in before the end of 2020 are now firmly underwater.

However, assets can bottom out for longer than you might think, and a new regime is often preceded by a crash that causes maximum pain and capitulation, which we have yet to see. Also, with the S&P 500 hovering around its 200-week MA for the first time since the COVID-19 crash, investors ought to be wary of dip-buying for short-term gains.

If your horizon is longer-term, then these are certainly good entry points, particularly with bitcoin trading beneath its 2017 high. Just be aware that if investors’ worst fears are realised in US equities, it’s hard to imagine the pain not being felt in crypto. However, on the other hand, if the Fed do pivot with their monetary policy, then cryptocurrencies could also be a major beneficiary, so there are two-way risks here.

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