Cryptocurrency and broader financial markets showed signs of stabilization midweek after experiencing significant declines from August 2 to August 5.
Crypto Assets and Financial Markets Stabilize After Recent Drops
Despite traditionally low correlation between major tokens and other asset classes, recent volatility in traditional markets has impacted crypto valuations.
The decline began after a weaker-than-expected U.S. employment report on Aug. 2. The report pointed to a rise in the unemployment rate reminiscent of past recessions, raising fears of an economic downturn.
This led to weaker performance in cyclical assets like stocks, while strengthening traditional safe havens like U.S. Treasuries, the Japanese yen and the Swiss franc. Non-U.S. stocks and strategies that bet on U.S. equity volatility also underperformed.
While both Bitcoin and Ethereum experienced declines, Bitcoin performed relatively better on a risk-adjusted basis, Ethereum, however, underperformed compared to other crypto assets and many traditional market segments.
Historically, Ethereum’s price has typically fallen by about 1.2x more than Bitcoin during downturns. The recent “crypto winter” saw Ethereum fall by about 1.8x more than Bitcoin, indicating unparalleled downward pressure.
If the U.S. economy avoids a recession and continues on track for a “soft landing,” Grayscale Research expects token valuations to recover and Bitcoin to retest its all-time high price later this year.
However, even in a weaker economic environment, Grayscale Research has reason to believe that the downside risk to prices may be more limited compared to past declines.
These include relatively stable net demand from new US-listed ETPs, a lack of credit provided by central financial institutions during this cycle, and relatively low altcoin returns since the beginning of the year.
The changing political climate in the US around the crypto industry could also reduce downside risks to valuations compared to past cycles.
*This is not investment advice.