Ruholamin Haqshanas
More than $144 billion was wiped off the crypto market in less than six hours on Thursday. The move came after a sharp drop in US markets that saw the Dow Jones Industrial Average plunging by more than 1,000 points (3.2%), marking one of the worst days for investors since 2020.
Stocks, Crypto Drop Sharply After Rally on Interest Rate Hike News
Stocks and crypto fell sharply on Thursday, eviscerating all of their gains from the prior session in an unprecedented reversal that delivered investors one of the worst days since 2020.
The Dow dropped 1,063 points (3.12%) to close at 32,997.97. The tech-heavy Nasdaq Composite plunged by around 4% to finish at 12,317.69, its lowest closing level since November 2020. And the S&P 500 lost 3.56% to close at 4,146.87.
The steep drop came after a nice rally for stocks on Wednesday, when the Dow surged 932 points (2.81%) and the S&P 500 gained 2.99%, marking their best days in nearly two years. The Nasdaq Composite had also gained 3.19%.
Similarly, the crypto market experienced a sharp decline along with the rout in stock markets. Bitcoin, which gained 5.3% on the previous day, fell as much as 11% to $35,611 on Thursday, the biggest intraday drop since January 21. Other popular cryptocurrencies also shared the same fate, with Ethereum, Avalanche, and Solana dropping by 8.7%, 15%, and 11%, respectively.
Historically, there has not been a significant correlation between crypto and the equities market. However, since the onset of the war in Ukraine, the correlation between Bitcoin and equities has been increasing — which is evident from the recent slump in crypto that closely followed the stock market.
Josh Olszewicz, head of research at digital asset fund manager Valkyrie Investments, said the increasing correlation between Bitcoin and US equities market is likely due to increasing US presence:
“Bitcoin has become increasingly correlated with U.S. trading hours and U.S. traditional market indices, likely due to a combination of increasing U.S. institutional presence as well as the absence of China after the sweeping bans last year.”
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Why Did the Markets Plunge?
While a mix of factors could have contributed to Thursday’s stock market crash, some experts believe upcoming rate hikes might have scared investors away. Jason Lau, the San Francisco-based chief operating officer of the Okcoin exchange, said:
“Investors are jittery about the Fed continuing to raise interest rates after yesterday’s 50 bps hike. The potential of additional rate hikes makes the trajectory of the global economy uncertain.”
The US Federal Reserve started raising interest rates in mid-March in a bid to fight surging inflation. At the time, the central bank announced a 0.25% increase. On Wednesday, the Fed voted to raise rates by another 0.50% and said it will begin tapering by June. Fed Chair Jerome Powell also insisted that a 0.75% increase is “not something that the committee is actively considering,” which arguably fueled the rally in stocks.
However, analysts believe the Fed is open to the idea of taking rates above neutral to control inflation. Zachary Hill, head of portfolio strategy at Horizon Investments, said:
“Despite the tightening that we have seen in financial conditions over the last few months, it is clear that the Fed would like to see them tighten further. Higher equity valuations are incompatible with that desire, so unless supply chains heal rapidly or workers flood back into the labor force, any equity rallies are likely on borrowed time as Fed messaging becomes more hawkish once again.”
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About the author
Ruholamin Haqshanas is an accomplished crypto and finance journalist with over two years of experience writing in the field. He has a solid grasp of various segments of the FinTech space, including the decentralized iteration of financial systems (DeFi), and the emerging market for non-fungible tokens (NFTs). He is an active user of digital assets for remittances.
