Bitcoin is pushing its way above $ 40,000. But it’s still down there big.

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The time of dreams


Bitcoin
briefly broke through a support level of $ 40,000 early Monday amid a sell-off in cryptocurrencies and tech stocks as bond yields continued to rise.

Bitcoin, the largest crypto by market value, traded at $ 39,558, according to FactSet, before rising to around $ 41,720.


Ether,

the second largest crypto, also fell below $ 3,000 tech support, hitting a low of $ 2,948, according to CoinMarketCap, before falling back to around $ 3,090.

While Bitcoin and Ether were both down around 2% in trading on Monday, other cryptos faced worse:


Solana

was down 4.8%, Binance Coin was down 2.8%, and


Cardano,

down 3.6%.

Cryptos appeared to be falling in tandem with other rate-sensitive assets, including tech stocks. Heavy technology


Nasdaq Composite Index

was down 2.3%. The 10-year Treasury yield rose another 3.8 basis points, or hundredths of a percentage point, to 1.81%.

Crypto-linked stocks were also down sharply on Monday, with


Global Coinbase

(symbol: COIN) from 7% to $ 217. And the


Amplify transformational data

exchange-traded fund (BLOK), a basket of crypto-linked stocks, fell 4%

Bitcoin is now down 12% in 2022. And it is becoming clear that Bitcoin and other cryptos are trading as sectors that are not doing well in a rising rate environment.

“The correlation of Bitcoin / 10-year returns collapsed completely this week,” Nomura Instinet said in a note Monday morning. Bitcoin, according to the data, has been closely correlated with 10-year returns since August 2021, as yields rise, so has the price of Bitcoin.

But that correlation has shifted so far in 2022. The 10-year yield climbed to 1.76% on January 10 from 1.55% on January 3. This coincided with Bitcoin’s drop to $ 40,000 from around $ 46,500, a drop of 14%.

Bond yields are rising on expectations of much tighter monetary policies in 2022, as the Federal Reserve and other central banks raise interest rates in an attempt to slow the surge in inflation. Goldman Sachs now expects the Fed to hike rates four times this year, down from three hikes previously. The Fed has indicated that it may also begin to reduce its balance sheet by $ 9 trillion.

The measures are likely to drain excess liquidity from financial markets, removing the support the Fed and other central banks provided during the pandemic to help support the global economy.

Bitcoin, of course, has long been touted as “digital gold” – a store of value that should withstand high inflation and the declining purchasing power of fiat currencies.

But Bitcoin now appears to be failing its store of value test as yields rise. Additionally, there could be further declines to come if yields continue to rise.

“Bitcoin has been misclassified as a hedge against inflation,” says Spenser Lerner, head of multi-asset solutions at Harbor Capital Advisors. “My take is that Bitcoin is used more to generate excess cash. ”

He argues that Bitcoin has benefited from the Fed’s easy money policies. Low interest rates and excess liquidity fueled the rise in prices of assets further off the risk spectrum. Now that the Fed plans to tighten, capital is returning to safer areas, putting pressure on high-growth tech stocks and cryptos.

“The opportunity cost of holding stocks at multiple levels increases as the Fed drains liquidity,” Lerner said. “This is happening at the same time as inflation is high. But it confuses people to think of digital assets as a hedge against inflation. It’s the opposite: with higher inflation and cash depletion, crypto assets lose value.

Other analysts also see an inverse correlation between cryptos and tighter monetary conditions.

“Although the crypto market is in oversold territory, it is largely impacted by global markets and economic conditions,” Marcus Sotiriou, analyst at digital asset broker GlobalBlock, said in a comment. “The plans declared by the Federal Reserve for rate hikes in 2022, as well as the reduction in the rate of monthly bond purchases, have so far contributed to the sale of Bitcoin.”

Crypto bulls argue that Bitcoin will eventually settle and then rebound. Mike Novogratz, CEO of Galaxy Digital said on CNBC last week that he expected the price to drop to around $ 38,000 to $ 40,000: “We’re seeing huge institutional demand on the sidelines. I am not nervous in the medium term.

Yet Bitcoin is now down more than 40% from its highs of around $ 68,900 reached last November. If this isn’t a painful bear market, it’s hard to say what it is.

Write to Daren Fonda at [email protected]


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