Fears of a prolonged “crypto winter” are growing amid a sharp sell-off in Bitcoin (BTC) and other digital currencies.
Bitcoin, the world’s biggest virtual currency by market capitalization, briefly plunged below $33,000 U.S. yesterday (January 24) to its lowest level since last July. It’s since recovered back above $36,000 U.S. but is still down nearly 50% from a record high of $69,000 U.S. reached in November.
The entire cryptocurrency market has now shed more than $1 trillion U.S. in value since Bitcoin’s all-time high, as tokens such as Ethereum (ETH) follow Bitcoin and also trade sharply lower. Ethereum has more than halved in value since reaching its peak last November, while smaller digital coins have fallen 60% or more.
That’s got some cryptocurrency investors talking about the possibility of a “crypto winter,” a phrase referring to historic bear markets. The last crypto winter occurred in late 2017 and early 2018 when Bitcoin crashed as much as 80% from its all-time highs.
The rout in cryptocurrencies is happening in tandem with a slide in global stocks. Experts say that involvement from large institutional funds has meant digital assets are becoming more intertwined with traditional stock markets.
The S&P 500 has fallen 8% since the start of this year, while the technology heavy Nasdaq index is down more than 12%. The correlation between Bitcoin and the S&P 500 hit a fresh all-time high of 0.3 on Monday, according to Coin Metrics data.
Traders fear potential interest rate hikes and aggressive monetary tightening from the U.S. Federal Reserve will drain liquidity from the stock market. The U.S. central bank is considering raising rates in response to inflation, and some analysts say it could result in the end of the era of ultra-cheap money and sky-high valuations.
The moves lower in major digital coins has been a boon to stable coins, or digital currencies that track the value of sovereign currencies like the U.S. dollar. USD Coin, the second-largest stable coin, has added over $5 billion U.S. in market value since last weekend, according to CoinGecko.
