FTX-Induced Crypto Swoon Saps Bitcoin’s Sway on Global Investors

The pain spread across cryptocurrencies by the meltdown of Sam Bankman-Fried’s FTX is fracturing the link they once had with other risk assets, a sign that Bitcoin’s influence on global investors may be diminishing.

The idea that Bitcoin was a worthwhile part of a diversified portfolio of risk assets is fraying, with massive losses generated by the revelation that even FTX, until recently considered one of the most blue-chip names in crypto, was unsound. That’s a far cry from the start of this year, when Bridgewater estimated that 5% of Bitcoin was held by institutional-level investors. 

Bitcoin dropped 23% last week, its worst tumble since June, and was last trading at about $15,879. The S&P 500 Index soared 5.9% in the gauge’s best gain since June. The correlation between the two last week dropped to the lowest this year, based on a 20-day study. The performance gap between Bitcoin and the Nasdaq has hit the widest since 2020. 

“That idea of using crypto as a high-beta play on risk is fading, because there are easier ways to play that elsewhere that don’t suffer from the same systemic risk,” said Chris Weston, head of research at Pepperstone Group. “This is a structural issue, it’s about the actual architecture of the crypto system and the confidence you can have in that. Who’s next is the question on many people’s lips.”

The latest crypto rout came as investors were already souring on the space and as declines in price shrank the footprint of virtual currencies. The total market value of all tokens has dropped more than 70% from a record peak of just under $3 trillion set a year ago, according to the CoinGecko website. 

The current worth of $843 billion as assessed by the tracker is now less than 1% of the world equities market. Stocks are down a still sizable 16% over the period but a resurgence of broad risk appetite, driven by hopes for a slower pace of central bank interest-rate hikes, sent equities up by more than $13 trillion since they bottomed out Oct. 12.

The stark contrast between sliding cryptocurrencies and ebullient stocks underscores how rapid the turnaround has been for an asset class that was close to winning over mainstream investors less than a year ago. 

Back in 2021 JPMorgan Chase & Co. strategist Nikolaos Panigirtzoglou wrote Bitcoin could theoretically reach $146,000 in the long term by crowding out gold -- last week he said the current upheavals could send it as low as $13,000. A PWC survey in April found that 42% of crypto hedge funds were predicting Bitcoin to trade between $75,000 and $100,000 by the end of 2022.