Cryptocurrencies have been quite volatile in recent weeksInvestorsare bracing for more gyrations in bitcoin and othercryptocurrencies, as worries over a hawkish Federal Reserve threaten to squelch risk appetite across markets.The volatility traditionally associated withcryptocurrencies has been on full display in recent weeks.
Bitcoin, the largestcryptocurrency, is up by around 33 per centsince January24 and recently traded at $43,850, rebounding from a tumble that cut its price in half from November's record high.
Its main rival, ether, is up around 45 percentsince January24 at around $3,200, following a nearly 56 per centnosedive from its record high of $4,868, also in November.While proponents ofcryptocurrencies once touted their lack of correlation to other assets, bitcoin and its peers saw huge gains over the last two years, rallying along with stocks as the Fed and other central banks pumped unprecedented levels of stimulus into the global economy.
Bitcoin is up 1,039 per centsince March 2020 and ether has risen 2,940 per cent, though the rallies in bothcryptocurrencies have been interrupted by numerous-stomach churning selloffs.Their recent volatility has come amid a broader market selloff driven byinvestorsrecalibrating their portfolios to account for a more aggressive Fed, which is now expected to raise rates as many as seven times this year as it fights surging inflation.
The benchmark S-P 500 index is down 5.5 per centyear-to-date, while the tech-heavy Nasdaq has lost 9.3 per cent.Worries that an aggressive central bank tightening cycle going forward will hamstring risky assets has made it difficult for some traders to maintain their bullish outlook on bitcoin and othercryptos, an asset class already identified with intense volatility.Escalating tensions in Ukraine, where Washington warned a Russian invasion could begin any day, could also spark broad market moves,investorssaid.Bitcoin has "really become the ultimate momentum trade and there are so many risks that can trigger a 40 per centdrop out of nowhere," said Ed Moya, senior analyst at Oanda.Bitcoin's volatility hasn't stopped some analysts from trying to gauge the currency's fair value or point out potentially important price levels.Analysts at JPMorgan estimate bitcoin's current fair value at around $38,000 some 15 per centbelow its recent price based on its volatility in comparison with that of gold, another assetinvestorsoften use to hedge their portfolios against inflation and economicuncertainty.Vanda Research, meanwhile, said in a recent note that most of the bearish bets on a weaker bitcoin price were entered at around $47,000, and "there could be a large short-squeeze if the aforementioned threshold is crossed, and retailinvestorsreturn tocrypto-trading."Meanwhile, correlations between bitcoin and the S-P 500 reached an all-time high on January 31, according to data from BofA Global Research, undercutting the case for those hoping to use thecryptocurrency as a hedge against market turbulence.Investorsnext week are expecting minutes from the Fed's most recent monetary policy meeting, due out Wednesday.
Walmart and chipmaker Nvidia Corp will be among the companies reporting results, as corporate earnings season rolls on.Someinvestorsare steeling themselves to ride out the volatility in bitcoin, betting that the long-term value proposition of blockchain technology, the built in supply limit, and the network effect it produces, will endure despite frequent price swings.Jurrien Timmer, director of global macro at Fidelity, likened the current speculation incryptocurrencies to the turbulence tech stocks experienced during the dot-com era more than two decades ago, a boom-and-bust period that saw a comparatively small group of companies left standing."Amazon is still around and Apple is still around and they're bigger than ever and the thinking is that for bitcoin that will be the same," he said.
"But it's not immune to those waves of speculation and sentiment."Bitcoin could reach $100,000 as soon as 2023, Timmer has said, based on his supply/demand models.Others believe maturecryptocurrencies like bitcoin and ether are unlikely to deliver the kind of eye-watering gains they have notched since their founding.Instead, they are looking to the universe of new, alternative coinsthat are being created to take advantage of the money pouring into thecryptospace, including the metaverse and NFTs, which saw $30 billion worth of venture capital investment last year, according to PitchBook.Some altcoins include cosmos, Terra Luna, and Polkadot, which are down around 20.5 per cent, 38 per centand 25.5 per centyear-to-date, respectively, according to coinmarketcap.com.Understanding the risks linked to them and decentralized finance is going to be one of the main challenges forinvestorsin 2022, said Lily Francus, director of quantitative research strategy at Moody's Analytics.Cryptocurrencies "are going to remain very volatile going forward, but there are significant players on both the institutional side and the retail side that are still growing, so the interest is still growing," said Oanda's Moya.