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Whither Crypto?

Mike Zaccardi

NO DOUBT ABOUT IT, cryptocurrencies have had a raucous 2021. From bitcoin and ether’s fast start in January, to the rise of dogecoin in April and then the shiba-inu October shenanigans, folks owning seemingly any digital currency likely experienced big gains if they were owners since early 2021.

What if folks got in later in the year? Despite being all over the financial press and having inked all sorts of sponsorship deals—including the naming rights to what was once the Staples Center in Los Angeles—total crypto market cap today is pretty much unchanged from the peaks reached in May and September, and down somewhat from the Nov. 11 all-time high. Still, total crypto market cap is up 211% year-to-date.

Some investors keep a close eye on the two stalwarts in crypto land: bitcoin and ether. Those coins rallied sharply before the stock market close on Thursday. Santa came early for so-called HODLers, those holding on for dear life to their cryptocurrencies. Tech stocks also rose on the final trading day before Christmas.

CNBC’s Brian Kelly noted that bitcoin’s 30-day correlation with the Nasdaq Composite index is 47%—the highest since September. Kelly contends bitcoin might be more correlated with the stock market in the coming years as institutions accept it as a traditional asset.

If that thesis plays out, owning cryptocurrencies might lose some of its luster going forward. After all, if virtual currencies will simply move with share prices, then the diversification benefit diminishes.

Next year will be yet another fascinating one for cryptos, especially given that massive gains have been made, but recent performance has been lukewarm. Next year will also be a period of tightening credit conditions if the Federal Reserve has its way. On top of that, there will almost certainly be less fiscal stimulus sloshing around. Those were tailwinds earlier this year but will be headwinds in 2022.

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Thomas Maurer
Thomas Maurer
11 months ago

It does look like crypto is becoming more correlated with the crypto market. What I think will be interesting to see is how crypto performs in a big stock market crash i.e. dotcom or GFC. I’ve seen a few analysts talk about how we are yet to see how it will perform in that environment. Potentially a big move down as leverage gets wiped out.

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