Jamie Burke, the CEO of crypto venture fund Outlier Ventures, says that crypto has been behaving exactly like a stock and that the two are moving in lockstep because the lines between them have blurred. The vertiginous price highs and the feverish hype around crypto have sucked in a lot of new money from institutional and retail investors spending their stimulus money on stock trading platform Robinhood. “Digital assets began to be linked to the wider macro environment,” Burke says. “There’s a whole lot of money that came into the financial system: They began to use that to speculate, and so crypto definitely benefited from that. But similarly, when the wider macro environment changes you see that negatively reflected in digital assets.”
“I also think crypto might enjoy more extreme highs on good news and extreme lows on bad news. So for example—if peace were declared by Russia, I think crypto would pump. Why? It doesn’t really make any sense, but it probably would,” he says.
Another way to look at it is that crypto was never a hedge against inflation—or against anything, for that matter. Instead, it was always bound to become just another piece of the wider financial ecosystem. Sam Doctor, chief strategy officer at consultancy BitOoda, says that crypto is now used as one of many possible “risk-on” assets. People looking for a place to park their capital, and who have possibly already put money into the stock of high-risk technology companies, would naturally move up the ladder to bitcoin, and then to more obscure crypto assets. “With interest rates close to zero, the market essentially said, ‘let’s go ahead and take some risk, it’s fine,’” Doctor says. Now that the rates are going up and inflation is biting, crypto is the first thing that gets ditched from a portfolio, he argues. “This is the only time now we’re actually looking at bitcoin and asking whether it really is an inflation hedge. And the answer that the markets are telling us is: no.”
But one can only place so much blame on general macroeconomic conditions and stock market upheavals for affecting cryptocurrencies’ downward trend. Some of the pain is doubtless self-inflicted. Look at the meltdown of terra luna, an “algorithmic stablecoin” project whose value was also supposedly pegged to the dollar, which lost nearly 99 percent of its value in May, pulverizing $42 billion dollars of investor money in the process, according to cryptocurrency forensics company Elliptic. Terra’s dollar parity relied on economic incentives and code, as opposed to hard cash. That mechanism, economists had pointed out, could not work, barring a continuously increasing demand for the asset. When people started cashing out in droves, the currency crumbled. (Terra’s creator, Do Kwon, did not respond to several requests for an interview.) Celsius, which had a sizable investment in Terra, is now dealing with liquidity issues, and over the weekend it suspended all withdrawals. (Celsius executives did not respond to emails, texts, or voicemail messages.) In other words, in the past couple of years, as an anything-goes market awash in cash looked for new places to pour money into, schemes that have tenuous economic fundamentals attracted capital—until the tide turned.