Bitcoin plunged below $20,000 after Fed Chairman Jerome Powell's warning of more pain for the economy Friday. It gave up the $21,000 level it had held through much of last week and broke below it as it extended losses over the weekend. It is paring some of that loss today as it hovers around the key level.
The second largest coin, ETH saw a steeper plunge of 4% and was changing hands at $1,497.41. Other altcoins — Solana, Cardano, Litecoin, Dogecoin and others — fell with the leading coins.
Coins fell with a broader market that saw the Nasdaq dive nearly 4% on Friday, while the S&P 500 fell more than 3%.
Coins did not always move in the same direction as the stock market. But they are now.
The strong correlation is a recent trend, according to several studies. From 2017 to early 2020, crypto moved both with and against stock market trends.
Bitcoin did not mirror stocks until the pandemic bull market, when cryptos rose with the market indexes.
Two Old Crypto Tales: Inflation Hedge, Diversification
Before 2020, Bitcoin did not move in any particular direction with the market. That made a strong case for two theories:
The first is that cryptos, and in particular Bitcoin, are good diversification tools. When stock momentum does not affect another asset class, that is usually a good reason to use that asset class to diversify holdings.
The second theory is that Bitcoin is an inflation hedge that will store value when inflation drives stock prices up and currencies down.
Bitcoin's Deflationary Algorithm
The world's most famous cryptocurrency was set up to address exactly the kind of pressures that rising asset prices and falling currencies cause — thanks to its mining cap. The total amount of Bitcoins is capped at 21 million.
As an example, while money supply increased when the Fed purchased bonds during the pandemic, the growth in the supply of new Bitcoins has decreased. That is because fewer and fewer new Bitcoins are available to miners as the cryptographic puzzles get harder and harder to crack. Around 19 million, or 90% of total Bitcoins, are in circulation in the 12 years since the first bitcoin was mined. But it will be 2140, or over a century, before the remaining 10% is in circulation.
So why is Bitcoin unable to be the store of value it was set up to be?
Crypto analytics firm Chainalysis suggests a maturing crypto market is the reason. Growing adoption has made Bitcoin more volatile and inflationary, and therefore less of a store of value.
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In a sign of broadening acceptance, the U.S. Office of the Comptroller of the Currency (OCC) in July allowed banks to offer custody for their customers' crypto. Bitcoin is also seeing institutional interest from fund managers. Recent research shows that global crypto adoption has grown.
Estimates by Singapore-based Triple A suggest that 320 million users use crypto worldwide, based on several reports and surveys. According to Chainalysis's crypto maturity model, banks have started offering custody of crypto. But crypto lending is still not widely adopted. Fidelity is one of the few to allow institutional clients to use bitcoins as collateral for lending.
Will Bitcoin Retest $17,000?
Investors should watch if the current strong correlation with the stock market is wearing off. A low correlation results in price discovery for assets like Bitcoin. Also wait for Bitcoin to make a strong move back above the 50-day moving average and new and lower buy points.
The coin tested levels below $20,000 in July. Leading exchange Coinbase's order book is showing a return to $20,000, but watch for a plunge down to June's lows below $18,000. That could take the coin to December 2020 lows of $17,589 before Bitcoin builds a base again.
