Bitcoin and the crypto space have experienced marked volatility this week, with the macro environment playing a large role in bitcoin’s recent pullback, alongside the decoupling of the third-largest stablecoin, Terra’s UST, from its dollar peg. This exact kind of volatility isn’t anything new for the space. However, for investors that may be second-guessing their exposures, Matt Hougan, CIO of Bitwise, has some advice.
“I remember this exact market feeling from 2018 when bitcoin fell more than 80%, briefly trading below $4,000 a coin,” Hougan says in a video on Bitwise’s website. “At difficult moments in the market like this, what I like to do is take a step back and ask myself ‘has anything fundamental changed about my investment thesis on crypto?’”
This means considering if there have been new developments, technologically focused limitations, or changes to the current regulatory environment that was previously unforeseen and would change your long-term investment thesis on crypto.
While the stablecoin UST losing its $1 peg sent a shockwave through all of crypto, it appears to now be a siloed event and reaction. Tether, the largest and most established stablecoin, briefly traded below its $1 peg on Thursday as market fears caused $3 billion in tokens to be withdrawn from the blockchain. It has since recovered, reports CNBC.
Luna, the associated cryptocurrency for the Terra network, has crashed to $0 and the blockchain was halted yesterday. It’s important to note that UST was not backed by real-world assets, instead relying on an algorithm that mints UST tokens and burns luna for its peg, while Tether is pegged to real-world assets such as bonds.
Crypto's Performance Driven by Macro Environment
Bitcoin rode the rally, dropping briefly below its current resistance around $26,000 on Thursday, May 12, before climbing to around $30,000 on the same day. Aside from the price movement yesterday, bitcoin and crypto have largely been impacted by the macro-environment that is seeing many investors become strongly risk-averse.
“Crypto is being caught up in the same risk-off macro trend that’s driving down the price of tech stocks and other volatile assets,” says Hougan.
Volatility is nothing new for crypto. Hougan explains that throughout its history, crypto has experienced drawdowns greater than 70% on seven different occasions, largely tied to negative events from the macro side.
“Over the long-term time horizon, crypto has always rebounded. In fact, despite this recent pullback, crypto remains the best performing asset class in the world when measured over a three-, five-, or ten-year horizon,” Hougan explains.
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