Amid the turmoil, some $130 billion was yanked out of cryptocurrencies between Sunday and Monday, according to Alex Tapscott, Managing Director of Ninepoint Partner's Digital Asset Group.
In the last week alone, Bitcoin shed more than 20% at its troughs, with so-called smart contract currencies faring even worse: Ethereum (ETH-USD) swooned by over 30% within the same period, while Solana (SOL1-USD) has plunged by more than 40%. Outages on the Solana blockchain exacerbated network fees and forced some decentralized finance (DeFi) investors to liquidate their positions.
"Volatility has been the norm historically in digital assets. As an emerging asset class, [crypto's] in a constant state of price discovery," Tapscott said on Monday.
"Through their history, digital assets have become accustomed to and therefore resilient to volatility. Even though Bitcoin has been declared dead in the mainstream media more than 400 times, it keeps coming back," he added.
And true to form, BTC rallied sharply late into the session on Monday as bargain-hunting buyers of risk assets gave prices a boost. Recently, crypto and stocks have moved in near lock-step.
However, the depth and severity of the downturn couldn't be more stark for crypto, which has shed a collective $1.43 trillion since the peak in early November, as the Federal Reserve moves to reverse crisis-era liquidity that's fed inflation and inflated asset prices.
Monday's volatile price action saw two new Bitcoin-linked exchange-traded funds (ETFs) — launched last fall amid much fanfare — dragged to new record lows (BTF) (BITO) before the rebound. And Bitcoin itself has shed about half of its value since hitting a record last fall near $68,000.
Bringing 'Bitcoin's fall to a stop'
Notably, SOL has dropped more than 40%, contributing to its correction, its underlying blockchain, Solana, suffered its latest outage on Friday. Extending at least two days, the outage excerbated network fees, in some cases, forcing some of its DeFi investors to liquidate their positions.
Over the weekend, more than $1.5 billion of derivatives positions were liquidated according to market analytics dashboard, Coinglass. While growing open interest in derivatives have increasingly exaggerated the volatility of the cryptocurrency market over the past year, Okcoin’s Jason Lau doesn’t believe derivatives will lead the market's next major move as it has in the past.
Factors behind crypto's grim drawdown range far and wide, and include risk aversion, opaque liquidations on crypto-based derivatives, and headwinds from global regulation. All of which suggest that, despite Monday's rebound, a resumption of the sell-off might only be a matter of time.
Lau, along with other crypto market watchers, suggest that the impending end to the Fed's cheap money era in the face of skyrocketing inflation is coloring the sentiment of crypto investors. Lau cited Bitcoin's increasingly tight correlation to the S&P 500 (^GSPC) as a sign of how much emphasis investors have placed on the Fed's policy meeting scheduled for Wednesday.
However, the market’s sensitivity to monetary policy might catch a break this week, Yuya Hasegawa, a market analyst for Tokyo-based crypto exchange Bitbank, told Yahoo Finance.
While the Fed is likely to hike interest rates by 25 basis points, some investors are growing increasingly nervous the Fed will raise by a half a percentage point. But Hasegawa said the committee could likely “tone down” it's hawkish rhetoric down given the current turmoil in the stock market.
The Fed's Open Market Committee "will refrain from unnerving the market further. So, there is a good chance that there will be no hawkish surprise, which could bring bitcoin's fall to a stop,” Hasegawa added.
Meanwhile, the dramatic sell-off suggests that "risk-on assets like stocks and Bitcoin are oversold so if hazarding a guess, I would say that we are due for a bounce or rally, especially if the Federal Reserve’s decision from the meeting turns out to be more benign than what some anticipate," Jon Wolfenbarger, CEO and Founder of the investment research firm Bull and Bear Profits, told Yahoo Finance.
For investors, the most pertinent question remains how quickly inflation can be quelled. Wolfenbarger suggested longer term hawkish policy must be accepted as the new status quo for many economies, “which is bearish for risk-on assets, particularly given how sensitive investors are today.”
Still, Bitcoin's correlation to risk-sensitive stocks is likely to hold for the near future, raising questions about whether crypto investors can legitimately claim it's a safe-haven, or store of value, like gold.
Yet some, like Baxter Hines, a crypto asset manager at Honeycomb Investments, insisted Bitcoin is still an inflation hedge, especially in emerging economies like El Salvador. The country's president, Nayib Bukele, is one of Bitcoin's most prominent boosters.
“I do think inflation rates affect crypto prices. If you look at countries around the world, whenever you see bouts of hyperinflation such as Turkey and Venezuela, people flock to crypto because it affects their purchasing power,” said Hines.
David Hollerith covers cryptocurrency for Yahoo Finance. Follow him @dshollers.