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Why are cryptocurrencies dropping? Bitcoin and Ether, Solana…

The cryptocurrency market has attracted different profiles of investors over the years. From experienced traders to people who had never invested before, the enthusiasm for the sector continues to grow.

Investors more inclined to risk generally love the high average volatility of cryptocurrencies. If we exclude the stablecoins phenomenon, we know that the weekly price change in the market can be increased.

It is good to keep in mind that volatility is a double-edged sword. When the market goes up, it brings significant gains to investors. However, price drops can be enormous in a bearish phase, and traders may get frustrated.

The price collapse that we have witnessed in cryptocurrencies has extended to the entire financial sector in recent weeks. Within this article, we try to understand what is going on and, above all, what to expect for next year.

It is helpful to remember that the information contained in this text does not in any way represent financial advice.

The relationship between cryptos and stocks

There is an excellent debate in the financial sector regarding the relationship between the stock market trend and crypto quotes.

Many famous crypto experts think there is a positive correlation between financial markets and Bitcoin. Tom Lee of Fundstrat Global Advisors, for example, is among them. A few years ago, Lee claimed to have found a direct link between Bitcoin and the S&P 500 index.

Tom Lee was not an isolated case. Data Trek frequently speaks of a positive correlation between Bitcoin price and the S&P 500 index. However, other experts do not share Lee’s opinion and that of Data Trek. A relevant part of the market believes that the correlation between Bitcoin and the stock market is negative.

How can this divergence of opinion exist on a purely mathematical aspect? The answer is simple: both sides are correct (and wrong). Nevertheless, we must consider that this correlation changes continuously over time.

Therefore, there does not seem to be a stable correlation between stocks and crypto markets. However, we observe that when the stock market enters a bearish phase, the price of cryptocurrencies also falls.

Why are the financial markets moving down?

Knowing that there is a positive correlation between the two markets in a bearish phase, one must understand what is happening in the stock universe.

The current decline recorded on Wall Street (and, consequently, around the world) seems to depend on two factors:

  • Market concerns from a new Covid-19 variant, which may lead to recent national lockdowns
  • Typical market performance in December, as we explain below.

Many news websites debate the first point is extensively. However, few talk about the average market trend at the end of the year.

The month of December is, for everyone, a period in which many end-of-year expenses accumulate. From Christmas shopping to tax commitments, it is common to need cash during this time. Many investors (both retail and professional) may decide to sell shares for this very reason.

We are not fortune-tellers, and it is not our intention to make rash predictions, but many investors are familiar with the so-called “Santa Claus Rally”. In the last week of December, Wall Street tends to enter a bullish phase for various reasons.

Is it possible to differentiate your crypto portfolio?

While we’re at it, it may be helpful to remember the impossibility of differentiating your portfolio by investing exclusively in cryptocurrencies.

There are many studies on the subject that, to sum up, state the following: the prices of altcoins (such as Solana) historically follow the trend of Bitcoin.

The reason why this happens is still under study, but it may depend on two factors:

  • The crypto market is still very young, and few investors understand the fundamental differences between coins
  • Many traders invest in the cryptocurrency sector by creating portfolios that include many coins. They do so by opening and closing positions simultaneously on the whole market.

For the moment, therefore, it is essential to remember that a good investment differentiation comes from the inclusion in the portfolio of distinct asset classes. 

It is desirable that, in the future, the financial culture in the crypto world will grow, leading to a better differentiation among coins.

What to expect from 2022

After this bearish phase, it is good to remember that exciting news is coming for 2022. The market hopes, for example, to finally see the birth of the Ethereum 2.0 project, with impacts on the Ether price.

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A recovery in the crypto sector could be around the corner, as it has already happened in the past. The market has good resilience, and it will be interesting to see how prices move in January.

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