As Stocks Swoon, Crypto’s Crucial Moment Approaches

The stock market got off to a poor start to begin the week, giving back gains from last Friday and renewing fears of an autumn correction on Wall Street. The Dow Jones Industrial Average (DJINDICES:^DJI) managed to limit its losses to less than 1%, but steeper declines for the S&P 500 (SNPINDEX:^GSPC) and Nasdaq Composite (NASDAQINDEX:^IXIC) signaled less tolerance among investors to remain committed to higher-growth stocks.

Index

Daily Percentage Change

Daily Point Change

Dow

(0.94%)

(324)

S&P 500

(1.30%)

(57)

Nasdaq

(2.14%)

(311)

Data source: Yahoo! Finance.

Advocates of cryptocurrencies have argued that Bitcoin (CRYPTO:BTC) and other popular crypto tokens should be considered an asset class separate and distinct from stocks. Over the past week, much of the crypto universe has held up well, even as stock markets swooned.

If the declines we’ve seen in major market benchmarks turn into full-blown corrections, then Bitcoin and its crypto peers will face a crucial test: Will they provide a safe haven in a stock market storm or will they fall along with other risk assets?

Person holding coins with the bitcoin symbol on them in front of eyeglasses.

Image source: Getty Images.

Holding up well so far

At least thus far, cryptocurrencies have been able to hold their value even in the face of stock market volatility. Bitcoin currently fetches more than $49,000, while Ethereum (CRYPTO:ETH) is just under $3,400. Both prices are up slightly on the day, and more importantly, they’ve risen 7% to 8% in the past six trading sessions — a period in which the Dow and S&P 500 are down between 2% and 4%.

A number of factors have supported the crypto industry lately. Investors are increasingly hopeful that regulators at the U.S. Securities and Exchange Commission will give the go-ahead for an exchange-traded fund that allows investors to put their money directly into Bitcoin and other cryptocurrencies. Various governments around the world are looking at adopting digital currencies as legal tender, while central banks are increasingly looking at coming out with their own digital assets.

Yet the investing psychology around Bitcoin remains fragile. Despite the tailwinds that have helped cryptocurrencies regain some of their lost ground after a major correction earlier this year, Bitcoin prices remain well below their highs above $60,000.

Some crypto investors blame that on the growing popularity of other tokens beyond Bitcoin and Ethereum. The rise of decentralized finance has enhanced the value of other platforms and their related cryptocurrencies, and some of them have generated far greater returns for investors than Bitcoin and Ethereum have recently.

What’s ahead for crypto?

That said, crypto has its own challenges to face that are independent of the stock market. Regulators in many countries around the world have singled out cryptocurrencies for harsh measures, most notably China’s recent outright prohibition of crypto trading. Regulatory efforts have often led to downdrafts in crypto prices, even when stock markets are behaving well.

Yet skeptics note that at times in the past, Bitcoin has correlated closely with stock market moves. That was especially true between 2018 and 2020, although correlations have fallen significantly in 2021 and are now starting to show signs of possibly being negatively correlated. This is what an investor would want to achieve true diversification.

There’s no way to be sure whether Bitcoin and other cryptocurrencies will keep holding up if the stock market falls further. But many investors expect they will. That makes the current environment a crucial moment for cryptocurrencies, and those who invest in them could see their confidence confirmed or shattered in the weeks and months to come.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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