Bitcoin (BTC) Market Update: St. Louis Fed President Bullard Says the Market Is 'Pricing in Too Little Tightening'

The dramatic selloff Monday in cryptocurrencies, which fell in tandem with stocks amid concerns about a slowing U.S. economy, not only made investors nervous, but also tested the case of bitcoin as a safe-haven investment.

Investors hoping that bitcoin will serve as a safe haven during an economic downturn may have had their hopes dashed on Monday.

As stocks fell sharply amid concerns about a slowing U.S. economy, bitcoin dropped more than 18% to fall below $50,000, a level last seen in February. The rest of the crypto market fared even worse, with ether dropping nearly 26% to hit a low of $2,116.

But the large movements of funds from trading firm Jump Trading to various crypto exchanges, which started on July 25, may have also contributed to ether’s steeper decline, according to data from blockchain intelligence firm Arkham Intelligence.

Here's a look at what experts are saying about the recent crypto sell-off and what lies ahead for the digital asset markets.

Bitcoin's Not-So-Safe Haven Status

Bitcoin's sharp decline on Monday, which came as a surprise to many in the crypto community, highlighted the close relationship between the price swings in traditional markets and the performance of the world's largest digital asset.

After rallying more than 40% this year to hit a high of about $64,000 in early April, bitcoin has been steadily declining as the U.S. Federal Reserve began raising interest rates and traders began pricing in the possibility of a recession.

However, the recent crypto sell-off, which began last week, appears to be a direct response to the downturn in equities, as traders continue to assess the health of the U.S. economy and the impact of the central bank's tightening monetary policy, according to several analysts.

“Bitcoin's correlation to the S&P 500 has been increasing since March, and now stands at 0.8, indicating that for every 1% move in the S&P 500, bitcoin tends to move in the same direction by 0.8%,” analysts at Bernstein wrote, according to The Block.

“If rate cuts and monetary liquidity is the usual template response to U.S. recession fears, we expect ‘hard assets’ such as bitcoin (digital gold) to reprice up.”

But Grayscale's Head of Research Zach Pandl said that if there is a U.S. recession, bitcoin will still decline, although not as sharply as it has in the past.

"Downside risks to token prices are lower than in the previous cycle, in our view, due to relatively low altcoin valuations, limited credit/leverage in crypto markets, and institutional demand for spot #Bitcoin and #Ethereum ETPs," Pandl wrote on X.

More Crypto Volatility Ahead?

In the short-term, there could be more volatility in store for crypto assets, according to several analysts.

"Watch for a few signs that could show where the crypto markets are headed—forced crypto liquidations as leveraged traders quickly exit amid a price drop, financial health of crypto firms and flows for crypto spot exchange-traded products," said Bitwise's Chief Investment Officer Matt Hougan.

Hougan added that investors should largely ignore short-term price cues and instead focus on the long-term fundamentals of bitcoin investing.

He pointed out that on March 12, 2020, when the world realized that COVID-19 was going to be a serious issue, there was a 37% single-day sell-off in the S&P 500, which was followed by a panicked sell-off in crypto assets.

However, after March 12, bitcoin went on to have a "tremendous" bull run and saw greater than 1,000% gains over the next 12 months, Hougan noted.

"In retrospect, March 12, 2020 wasn’t a time to panic," Hougan wrote in a recent note. "It was the best buying opportunity for bitcoin in a decade."

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