Crypto and related assets dropped Tuesday following the August inflation report that showed prices rose more than anticipated, signaling that the Federal Reserve is likely to hike interest rates by another 0.75% next week.
Bitcoin dangled above its crucial $20,000 mark as of Tuesday afternoon, selling off as much as 10% since the release of inflation data and outpacing the S&P 500's (-4.3%) and Nasdaq Composite's (-5%) losses. The total market capitalization for all crypto assets slipped below $1 trillion again, falling approximately 7% on the day to $998 billion from $1.07 trillion according to Coinmarketcap.
The losses underscore that cryptocurrency's fortunes are very much still tied to the moves by the central bank.
"Hopes of a soft landing, the end of the Fed hiking cycle, and a resilient consumer, are fading away," Edward Moya, a senior market analyst with Oanda, told Yahoo Finance. "So over the short term, cryptocurrencies are going to be vulnerable to further selling pressure."
In the past four hours, over $329 million worth of trader positions on bitcoin in the derivatives market have been liquidated with approximately 75% of that coming from long versus short BTC positions, according to crypto derivatives aggregator, Coinglass.
The sell-off isn’t troubling for Baxter Hines, chief investment officer of Honeycomb Digital Investments, crypto investment manager.
“Bitcoin and other cryptocurrencies being more forward looking tend to reflect expected headwinds for the near-term future. The threat of inflation gives the Fed more leeway to hike rates faster maybe than what people we’re thinking,” Hines told Yahoo Finance, adding that sentiment around risk assets may be so bad now that there "may be room for markets to run higher over the next year."
Volatility trading firms, which can take market neutral positions on various crypto assets, have seen a rush of new opportunities since the beginning of the month.
According to crypto index tracker Nomics, crypto trading volumes across all exchanges has risen 62% to $739 billion over the past week with trading activity in dollars having risen 20% to $134 billion over the previous 24 hours.
The bump in activity is due in part to traders and fund managers readying for Ethereum’s Merge upgrade later this week and others returning to the market after a slow summer when cryptocurrencies more broadly underperformed major stock indexes.
Ether, which has lost more than 6% for the same 24-hour period, had already lost steam over the weekend with Oanda's Moya pointing out that traders maybe readying for a "sell the event" reaction to the protocol's long-awaited Merge finale set for early Thursday morning,
The second largest cryptocurrency by market capitalization, which is finishing its transition to proof of stake in less than two days, was trading below $1,600 midday Tuesday and by the stock market's close showed a slight recovery.
Shares of companies holding bitcoin on their balance sheet such as Marathon Digital (MARA), Coinbase Global (COIN), Block (SQ) and MicroStrategy (MSTR) have tumbled and all show between a 7% and 12% in losses on the day as of Tuesday's close.
Shares of MicroStrategy, the largest corporate holder of bitcoin, are changing hands at $234 per share, a more than 12% drop since the inflation data release but showing minor recovery in after hours trading. The business intelligence software company turned bitcoin whale recently registered for the option to sell up to $500 million in stock to buy more bitcoin.
Looking to crypto's performance for the second half of September, Oanda's Moya thinks the market could still rebound if prices of major cryptocurrencies — bitcoin and ether — can sustain levels above $21,000 and $1,600, respectively.
"I still think we're approaching a moment where we will see cryptocurrencies begin to trade on their own fundamentals and that means it will not necessarily be just a leveraged trade of what's happening with tech stocks," Moya added.
David Hollerith is a senior reporter at Yahoo Finance covering the cryptocurrency and stock markets. Follow him on Twitter at @DsHollers