What happened
Today, three of the five largest cryptocurrencies by market capitalization, Bitcoin (BTC 0.95%), Ethereum (ETH 0.38%) and Solana (SOL 0.03%), saw substantial declines, bringing their weekly returns into the red. Over the past 24 hours, these tokens have sunk 5.5%, 7.3%, and 8.3%, respectively, as of 10:30 a.m. ET.
These returns generally paced the overall crypto market, which is unsurprising given that these three tokens account for approximately two-thirds of the aggregate market capitalization of the entire sector.
Interestingly, these three top tokens have begun to trade in closer correlation with equities in recent weeks, surging and plunging on macro news that has caused volatility not only in the crypto world but in equities as well. Today, it appears that overall risk-off sentiment from investors, in addition to concerns around rising coronavirus cases due to the omicron variant and tightening monetary policy related to surging inflation, have many taking a cautious approach to the crypto sector.
Image source: Getty Images.
So what
The increasing correlation between equities and cryptocurrencies we've seen of late has generally been a negative for many investors. Many look at digital currencies as a means of diversifying their portfolios. These higher-volatility assets tend to move investors up the risk curve, but also increase a portfolio's overall return potential, should the historical performance of these top tokens hold true over the longer term.
Thus, investors can expect to see higher volatility with cryptocurrencies relative to other assets such as stocks. However, when both asset classes consistently move in the same direction, investors may become concerned that even the best cryptocurrencies (such as Bitcoin, Ethereum, and Solana) are simply becoming higher-beta proxies for growth stocks. Accordingly, those looking for diversification and better risk-adjusted returns may not get them if this high-beta environment continues.
Now what
The historical performance of cryptocurrencies over the past decade (in the case of Bitcoin) and in recent years (in the case of all other cryptocurrencies) is impressive. However, it's important for investors to keep in mind that cryptocurrencies generally haven't had to weather a recession or major economic crisis. Bitcoin itself came into existence in 2009, after the Great Recession. Sure, the pandemic provided a brief pause for risk assets; however, we've seen low interest rates and an accommodative Fed juice risk assets to an incredible extent.
If the punchbowl gets taken away, the likelihood is that we'll see substantially higher volatility for all risk assets (equities, crypto, and others). Thus, those with a weak stomach may want to stay away from even the highest-quality tokens, such as these three juggernauts.
However, the longer-term track record these tokens have put up suggests capital is looking to find its way into technologies that could prove to be the building blocks for our future world. Bitcoin, Ethereum, and Solana are likely here to stay.
That said, questions remain as to what the near- to medium-term performance of these tokens will be in what could be a much more hawkish environment moving forward.
