A visual representation of Bitcoin.
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Cryptocurrencies rallied this week even as US equities pulled back briefly from their new year rally and major crypto lenders filed for long-awaited bankruptcy.
Bitcoin was last higher by about 12% for the week, according to Coin Metrics, while ether has gone up 14%.
By comparison, two of the three main stock averages were on track for the post lost week, which was shortened for the Martin Luther King holiday. The S&P 500 and the Doe Jones Industrial Average were last down 0.9% and 2.9%, respectively, for the week. The Nasdaq Composite, however, has been an outperformer. It rose slightly for the week and has gained 5% for the year, leading the other great indexes.
Bitcoin and ether rose 2.73% and 2.15%, respectively, in the same four-day period.
“Bitcoin looks like it’s trading in tandem with the Nasdaq and risk assets again, after last month’s decoupling,” said Sylvia Jablonski, CEO and chief investment officer at Defiance ETFs. “It’s good news for crypto investors that if inflation falls, and the Fed is closer to the end than the beginning of economic tightening, risk assets will take a breather and maybe attract investors again.”
Bitcoin traded in lockstep with stocks through most of 2022 as institutional investors entered the crypto market in the previous year and government stimulus and the Federal Reserve’s tightening of monetary policy became the biggest driver of the price.
However, by the end of the year, the correlation decreased and the price of bitcoin remained stable amid a wave of scandals and bankruptcies in the crypto industry and a general loss of confidence in the asset class.
Jablonski said bitcoin has benefited from its explosive performance this week as short-term sentiment favors Nasdaq stocks. Whether it remains depends on the Fed’s tightening path, and whether the economy is pushed into recession, he added.
This week’s rise in crypto prices is also in the midst of the latest blow to the industry: Genesis is one of the largest creditors in crypto and one of the largest unsecured creditors in FTX that filed for bankruptcy last night.
Owen Lau, an analyst at Oppenheimer, said that this week’s rise in crypto is an extension of the rally in risk assets that took place in the first two weeks of the year.
“Bitcoin stocks and digital assets were oversold last year,” he said. “These assets are more than worth the negative news from the collapse of FTX, the bankruptcy of BlockFi and the fall of Genesis.”
Investors and others are still mulling over the possible effects of the second and third order.
However, Jablonski of Defiance warns that if there are other similar blowups in crypto, digital assets cannot simply decouple from trading like risk assets, but start trading instead as “unwanted assets that cause investors to panic.”