As investors sell stocks across the board, “risk on” trading has made its way into cryptocurrencies. The market is down considerably since just before it opened on Thursday, and that’s when a sudden shock hit crypto.
As of 3:30 pm ET, the value of doecoin (DOGE -4.40%) had fallen 5.4% in the previous 24 hours, Ethereal (ETH -5.91%) down 7.8% and the sandbox (SAND -11.61%) down 11.8%. Ironically, early Thursday morning, stocks were up nearly 10% from their Wednesday lows.
Amidst the backdrop of a falling crypto market, the news related to the industry is quite positive. Congress is considering allowing companies to include cryptocurrencies in their 401(k) plans, which could attract a new swath of investors to the assets. California also announced that it will also study regulations to adopt digital assets, not fight them, as an executive order from President Joe Biden recently indicated.
Gucci also announced that it will start accepting certain cryptocurrencies in its stores starting this month, Bitcoin, Ethereum and Dogecoin among them.
Despite such positive news, the stock market crash is dragging cryptocurrency values down. Furthermore, the volatility of tokens means that stock market losses are usually magnified in crypto, at least in the short term.
The volatility we are seeing on Thursday is par for the course for cryptocurrencies. Investors should expect valuations to change dramatically, even if the news appears to be moving in their favor. What has really changed in the last six months is that crypto stocks have become much more correlated with the broader stock market.
Taking a step back, I see some positive news for the cryptocurrency industry. Cryptocurrency-accepting retailers are a positive step toward broader adoption, and a flood of developers are also moving into the space. That’s great for the development of the crypto economy, but it will take time for developers to build new projects and for user adoption to grow.
I am optimistic about developments in the crypto space, as well as what appear to be favorable trends in the regulatory environment, at least in the US. These should be tailwinds for the broader crypto market. But it will be a while before those things have a direct impact and clearly traders’ time horizons are getting shorter every day.
Big market sell-offs can be excellent buying opportunities for long-term investors, although they can be difficult to take advantage of. I plan to buy crypto assets in the coming months in anticipation of their growth over the next decade, but that doesn’t mean I think stocks will recover quickly. Even the best cryptocurrencies can take months or even years to return to their previous highs.