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This Has to Happen Before Investors Take Cryptocurrency Seriously

By Dan Caplinger – Jan 6, 2022 at 1:51PM

Key Points

  • Stock markets were mixed Thursday afternoon.
  • Cryptocurrencies were mostly lower.
  • Until individual tokens move independently of each other, many investors will steer clear of crypto entirely.

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It's holding back institutional and individual investors from buying in.

Thursday brought continued uncertainty to Wall Street, as investors kept trying to consider the ramifications of the Federal Reserve's latest meeting for the stock market and the economy. As of 1 p.m. ET, the Dow Jones Industrial Average (^DJI 0.41%) was down 24 points to 36,383. However, the S&P 500 (^GSPC 0.67%) added 14 points to 4,714, while the Nasdaq Composite (^IXIC 0.86%) gained 47 points to 15,147.

Cryptocurrencies, however, continued to lose value, extending declines from all-time highs several months ago. As the tug of war between crypto bulls and bears goes on, though, the more important question of how average investors perceive the digital asset market remains unanswered. Today's market action reveals a shortcoming of the crypto market, and change will be necessary before many investors will take cryptocurrency seriously.

Person assembling a cryptocurrency mining rig.

Image source: Getty Images.

Moving in lockstep

On its face, there wasn't anything particularly unusual about today's moves in prices of top crypto assets. Bitcoin (BTC 0.18%) was down almost 6% to just over $43,000. Ethereum (ETH -0.14%), meanwhile, fell 8% to around $3,425.

There wasn't anything fundamental that stood out as justifying these steep moves. Rather, investor sentiment seemed to hinge on the perception that crypto asset values will rise and fall with monetary policy, and the Fed's tightening stance is seen as a threat to further upward moves in Bitcoin and Ethereum.

Indeed, the near-universal downward movement throughout the cryptocurrency realm provides evidence for that view. If you look at the top 40 or so digital assets, you'll see very consistent, nearly lockstep movements downward. The only two exceptions early this afternoon were Cosmos (ATOM -1.25%) and Decentraland (MANA -2.31%), which actually gained ground.

Not all cryptos are the same

That kind of price movement is what you expect when investors don't see much distinction across different investments in a given asset class. Precious metals investors are used to seeing some days when gold, silver, platinum, and palladium all fall by roughly the same percentages in response to macroeconomic factors that affect them similarly. However, each market has its own dynamics, with supply and demand disruptions not necessarily moving completely in parallel.

The same should be true of cryptocurrencies. When Ethereum takes steps to extend the utility of its platform beyond what Bitcoin can offer, then you should see days when Ethereum rises but Bitcoin falls. Similarly, when smaller crypto projects find success, you should see more divergence across different digital assets, with potential rivals losing ground in comparison to assets that are gaining adoption and becoming fundamentally stronger.

To be fair, you can see some winners and losers shake out when you look more at long-term performance. Gains in Ethereum prices have outpaced Bitcoin's returns. You can find smaller tokens with stellar performance that leave larger digital assets in the dust. However, much of that has to do with liquidity and the relative size of markets, both of which can amplify price movements.

Still, there's enough correlation across all crypto assets that investors can't count on being rewarded for making smart calls about which cryptocurrency projects have the greatest chance of long-term success in their respective missions. That makes the risks involved untenable for many investors. But if the market matures to the point where you start to see clear divergences between winning crypto ideas and losing ones, it could spur the mainstream investor interest that so many in the cryptocurrency arena have looked forward to for years now.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy.

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