Bitcoin (BTC-USD) plunged by over 10% to below $40,000 on Friday, with the rest of the cryptocurrency market following suit as risk aversion created a downdraft for markets, ahead of the Federal Reserve’s widely telegraphed plans to raise interest rates.
With Russia's move to ban crypto assets lighting the fuse of the latest plunge, Bitcoin's price moves have become closely linked to technology shares, which have slumped on rate hike fears. On Friday, the Nasdaq tumbled deeper into correction territory, after Netflix (NFLX) surprised investors with weaker-than-expected subscriber growth.
Bitcoin has been “hit by another wave of risk aversion in the markets,” said Oanda analyst Craig Erlam, sinking below a key level of technical resistance at $40,000, where bulls and bears have fought for days.
Separately, cryptocurrency exchange Kraken set its bear case for Bitcoin at $26,300. In its 2022 cryptocurrency market intelligence report, Kraken said the crypto market as a whole isn't expected to perform as well this year compared to last, when Bitcoin rocketed to a record at over $67,000.
Ethereum (ETH-USD), one of the hottest digital coin trades that have soared in popularity thanks to the non-fungible token (NFT) boom, tumbled more than 12% and now trades below $3,000. Other smart contract layer-1 tokens like Cardano (ADA-USD), Terra (LUNA1-USD), Polkadot (DOT-USD), and Solana (SOL1-USD) all swooned by double-digits in intraday trading.
“More rates hikes is generally going to cause more pain for risk-on assets, and Bitcoin especially,” said Chris Matta, president of 3iQ Digital Assets US. The leading digital coin normally benefits from expansionary monetary policy, but is now getting hammered by expectations of a more hawkish Fed.
According to Matta, even if Bitcoin is still being looked at as an inflationary hedge by some investors, the Fed’s move to curtail inflation “isn’t going to put it at the top of the list” of many crypto investors.
Regulatory uncertainty and the crypto market’s top-heavy derivatives fueled by speculation are also weighing heavily on the market. On the derivatives side, about 200,000 positions were liquidated in the last 24 hours, totaling more than $800 million in losses and growing according to Coinglass.
Those liquidations enhanced the selloff, with 82% happening on the bull side, but Matta argued derivatives did not spark this drop.
For the past two weeks most of the funding rates in crypto futures has leaned to the short-seller side according to data from The Block Research.
“Considering the uncertainty right now around aggressive rate hikes, I think we could definitely see further sell offs, putting Bitcoin under $35,000 or potentially lower. It's not over yet” Matta added.
Though lauded as one of the key archetypes for last year's crypto boom, institutional investment is often pointed to as a major source for crypto's current risk-on behavior. This class of investors now dominates the market but according to Steve Kurz, head of asset management at Galaxy Digital, most average financial institutions still haven't deployed capital.
"We haven't seen anything out of the ordinary in terms of negative flows when you think about Bitcoin or ETH," Steve Kurz told Yahoo Finance. "There are questions about whether we're in a bull market or bear market but ultimately, I think that will trickle through to timing but not necessarily the ultimate decisions that get made."
Within the sector, further sell offs could come from the sale of reserve assets by Decentralized Autonomous Organizations (DAOs) and cryptocurrency miners, he suggested, which potentially must shed more of their funds to meet operation costs.
David Hollerith covers cryptocurrency for Yahoo Finance. Follow him @dshollers.