The drop in crypto on Monday reversed course on Tuesday.
The yen-induced route in the crypto markets on Monday didn’t last long. On Tuesday, major cryptocurrencies’ value jumped, although not back to their levels early in the weekend.
Bitcoin (BTC 5.77%) was up 7.4% as of 2:30 p.m. EDT; Ethereum (ETH 3.88%) was up 6.4%; and Dogecoin (DOGE 4.28%) rose 5.3%. This mirrored an improvement in the stock market, continuing a correlation between stocks and cryptocurrencies on high-volatility days.
Yen carry trade rebound
Yesterday’s move was driven by an unwinding of the yen carry trade, a leveraged bet on currencies and interest rates. But the fallout can involve unrelated assets like cryptocurrencies as the trade unwinds. That’s why the market crashed yesterday.
Today was simply a recovery from the drop yesterday. But it’s also possible the unwinding and delevering of this kind of trading isn’t over. A few days doesn’t make a trend, and there may still be volatility ahead if more leveraged trades experience rapid losses.
ETFs see outflow
What’s notable in the crypto market is the outflow of $423 million from Bitcoin exchange-traded funds (ETFs), according to Bloomberg. The growth of ETFs had brought billions of dollars in new investments into the industry, and that may not be sustainable in valuations drop.
For now, the ETF business is holding up, but a further decline in crypto assets could see retail investors who are buying crypto for the first time question the value of the asset.
The biggest fear is economic
What’s gotten lost in some of the huge swings in cryptocurrencies in recent days is the bigger economic picture. Crypto trades correlated to growth stocks. A big reason there’s been a longer decline for crypto is weakening economic news, like last week’s relatively weak jobs report.
If we zoom out, Bitcoin has fallen 13.8% in the past week; Ethereum is down 23.9%; and Dogecoin is down 21.9% over that time because investors are selling riskier assets. Crypto falls into that camp and is dropping as a result.
Without any real fundamentals to drive the crypto market higher, it’s possible a sell-off will ensue if the economy does take a turn for the worst.
Where does crypto go from here?
The tailwinds behind crypto over the past year have been intense, including the rise of growth stocks and risk assets and the introduction of crypto ETFs to the market. There was naturally a bounce in anticipation of some of these actions, but they’re not repeatable long term.
What may be more impactful long term is a change in Washington D.C. in the regulations and legal frameworks governing crypto. But that may not be just about getting more people to buy tokens. That will open up innovation on the blockchain, new business formations, and financial transactions, which will make crypto mainstream but may involve stablecoins and not cryptocurrencies themselves.
I think caution is in order in crypto today given the volatility and potential for a recession later this year. The crypto market’s hot streak could end quickly. Ironically, it may be a slower U.S. economy that does it.
Travis Hoium has positions in Ethereum. The Motley Fool has positions in and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.