What happened
As investors sell off stocks broadly, the “risk-off” trade has made its way to cryptocurrencies. The market has been down sharply since just before the trading opened Thursday, and that’s when a sudden crash hit crypto.
As of 3:30 p.m. ET, the value of Dogecoin (DOGE -4.30%) had fallen 5.4% over the prior 24 hours, Ethereum (ETH -6.03%) was down 7.8%, and The Sandbox (SAND -11.74%) was down 11.8%. Ironically, early Thursday morning, values were up by nearly 10% from their Wednesday lows.
Image source: Getty Images.
So what
Amid the backdrop of a falling crypto market, the news related to the industry is fairly positive. Congress is considering allowing companies to include cryptocurrencies in their 401(k) plans, which could bring a new swath of investors to the assets. California also announced that it will also look into regulations to adopt digital assets — not fight against them — as an executive order from President Joe Biden indicated recently.
Gucci also announced that it will begin accepting certain cryptocurrencies in its stores as early as this month, Bitcoin, Ethereum, and Dogecoin among them.
Despite those positive news items, the falling stock market is pulling cryptocurrency values down with it. In addition, the volatility of tokens means the stock market’s losses are generally magnified in crypto, at least in the short term.
Now what
The volatility we are seeing Thursday is par for the course in cryptocurrencies. Investors need to expect that valuations will swing wildly, even if news seems to be moving in their favor. What’s really changed in the last six months is that crypto values have become much more correlated with the stock market overall.
Taking a step back, I do see some positive news for the crypto industry. Retailers accepting cryptocurrencies is a positive step toward broader adoption, and a flood of developers are moving into the space as well. That’s great for the development of the crypto economy, but it’ll take time for developers to build new projects and for user adoption to grow.
I’m bullish on the development in the crypto space, as well as what appear to be favorable trends in the regulatory environment, at least in the U.S. These should be tailwinds for the crypto market overall. But it will be a while before those things have any direct impact, and clearly, traders’ time horizons are getting shorter by the day.
Big market sell-offs can be great buying opportunities for long-term investors, though it can be difficult to take advantage of them. I plan to buy crypto assets in the coming months in anticipation of their growth over the next decade, but that doesn’t mean I think values will recover quickly. It may take months or even years for even the best cryptocurrencies to get back to their previous highs.
