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NEW YORK: A brutal bout of selling that wiped billions of dollars from profitless growth companies, initial public offering stocks and special purpose acquisition company’s (SPACs) has now caught up with bitcoin, further stressing risk tolerances and brokerage balances among small-time traders.
Retail dip-buyers, whose willingness to stand firm amid turmoil has helped power the S&P 500 to a 21% gain in 2021, are nursing some of their worst wounds of the year as losses pile up in speculative corners.
A hawkish turn from the Federal Reserve and the Omicron variant have erased more than 10% off the market value of cryptocurrencies, US$50bil (RM211bil) from newly public companies and 14% from a basket of meme stocks.
While day-trader resolve has been tested before, it’s been years since it happened without the open-ended support from central banks, whose changing tone around inflation sent risk markets spinning last week. Professional speculators have already voted, offloading risk at the fastest pace in 20 months.
Big drops in an asset like bitcoin have the potential to lower confidence among the larger population of bettors, a concept described as negative wealth effect.
All told, crypto investors have some US$250bil (RM1.05 trillion) less to play with in their accounts than they did when stocks starting sliding Nov 26.
“Buying the dip did not work well last last week, so the retail traders could be pulling in their horns a bit,” said Matt Maley, chief market strategist for Miller Tabak and Co. “Since they have been so important to the demand side of the supply and demand equation this year, their absence is an unwelcome development for the bulls.”
If bitcoin, which trades around the clock, is any indication, markets will be in for more volatility.
The cryptocurrency lost as much as 21% since Friday’s stock-market close and swung wildly throughout the weekend.
The decline brought it down to around US$42,290 (RM178,644) at one point, well below its record high of near US$69,000 (RM291,482) just a few weeks ago.
Meanwhile, bitcoin futures open interest is also plunging and funding rates on a few major exchanges turned negative, meaning those with short positions are paying a premium – all signs crypto positions are in a liquidation frenzy.
The past week’s retreat across stocks and cryptocurrencies provided more evidence that bitcoin is an imperfect hedge for institutional portfolios.
While it has an alluringly near-zero correlation with major asset classes, whenever stocks have sold off 5% or more over a month over the past decade, bitcoin has dropped 86% of the time with an average 13% decline, asset manager Man Group wrote in a recent note.
“Bitcoin is seen as a key risk-on and risk-off asset, so if it stays down – and especially if it continues to fall – it will be a big red warning flag for other risk assets next week,” Maley said.