Cryptocurrency Bitcoin's outsized price drop vs Ether may stem from macro link

Bitcoin price has markedly underperformed rivals like Ether with its weekend drop, which may underscore its increased connection with macro developments. The largest cryptocurrency fell as much as 21% on Saturday before recovering, though it’s still trading near $48,200, down about 10% from Friday’s close. Ether, the second-biggest, dropped as much as 17% on Saturday and is now little changed over the three-day period. 

“The rest of the crypto market recovers at a much faster pace than Bitcoin” from events that create macro uncertainty, Fundstrat head of digital-asset research Sean Farrell said in a note Sunday. He cited reaction to three events Friday: news on the omicron variant, reaction to potential for an expedited Federal Reserve taper and action in the derivatives market.

Institutions and bigger investors have been buying into crypto over the past year or so at an accelerated rate as the market matures, products multiply and regulation gradually becomes clearer in some jurisdictions. That’s often been cited as a factor that could bolster Bitcoin’s price -- but the recent action hints that involvement of the big players could be a double-edged sword.

The quicker recovery in the rest of the market “speaks to the overwhelming level of institutionalization of Bitcoin over the prior 12 months as well as the independent market dynamics throughout the rest of crypto,” Farrell said. 

The scenario is a notable turn of events for a cryptocurrency that bulls tout as a store of value, and one that has been found less susceptible to big drops than Ether in previous analysis by Cornerstone Macro. But as institutions begin to go into Bitcoin, whether as part of a broader asset-allocation strategy or otherwise, it stands to reason that the flows might begin to affect the cryptocurrency as well.

“Ether has generally been more associated with growth in crypto subsectors like decentralized finance (DeFi) and non-fungible tokens (NFTs) than it has been with ‘inflation protection’ trade, so it hasn’t been as negatively impacted by the hawkish language out of the Fed,” said Stephane Ouellette, chief executive and co-founder of FRNT Financial Inc., in an email Sunday.

The weekend’s plunge is one more reminder that cryptocurrencies are a developing asset class and can be extremely volatile. Still, Ether is up more than fivefold year-to-date and Bitcoin has gained about 70%, compared with the S&P 500’s 20% advance and an 11% gain for MSCI’s all-country index. A Bloomberg Barclays global total-return index for bonds is slightly negative. 

The increasing institutionalization of the largest cryptocurrency “might explain why there was so much capitulation in Bitcoin markets on Friday evening,” Fundstrat’s Farrell said, “as legacy institutions look to preserve annual gains heading into year-end.”