Bitcoin struggles at $40K as crypto rout quickens, Russia-Ukraine saps risk appetite

Cryptocurrencies tumbled sharply on Friday, with losses outpacing those in other risk-sensitive markets, as geopolitical tensions stemming from the Russia-Ukraine crisis kept investors on edge.

In choppy trading, Bitcoin (BTC-USD) briefly cracked $40,000, a psychologically charged level that's punctuated its recovery from the brutal "crypto winter" selloff that drove the token from a record high hit last November. Buyer demand for the leading crypto unit, which was down over 3% on the day and is off 10% from Wednesday's high, has slowed, market participants say.

Over the past week, mounting tensions at the Russian, Ukrainian border have dominated sentiment across global markets. Whipsaw price action this week has yanked Bitcoin from as high as $44,627 to Friday's spike low at $39,745.

Other cryptocurrencies like Ethereum (ETH-USD), Solana (SOL-USD) and Fantom (FTM-USD) fared worse, falling by over 5% each, underscoring their higher volatility. In the market non-fungible tokens (NFTs) flows wane, having finally caught up to crypto's rout.

Volumes have peaked since Open Sea, the top NFT marketplace, saw record-breaking trading at the beginning of the year, analysts ay.

"NFT volume has imploded recently," Marcus Sotiriou, an analyst with U.K.-based digital asset broker, GlobalBlock (Ticker), wrote in a research note.

Since January, Open Sea's trading and monthly fee revenues have been halved, but remain double their 2021 average, according to crypto data provider Dune Analytics.

Lockstep with stocks

Crypto is still highly vulnerable to shifts in risk appetite, mainly stemming from Russia-Ukraine and fears of monetary tightening. Risk-off trading sessions have seen BTC trade in near-lockstep with equities, but that connection has diminished somewhat since January. However, the looser correlation between Bitcoin and gold has strengthened, based on the Pearson correlation.

The trading pattern for digital tokens and stocks still hinge on the uncertainty around how the asset may perform in an environment of higher interest rates and less liquidity from the Federal Reserve, according to Michael Safai, a managing partner with proprietary crypto-trading firm, Dexterity Capital.

Friday's trading is “a replay of the pattern, albeit temporary, that we’ve seen in recent months with major Federal Reserve announcements and inflation data. We’ve seen surges of exchange volumes over the past twelve hours with ether volatility exceeding BTC.”

Jason Lau, chief operating officer of the cryptocurrency exchange Okcoin, told Yahoo Finance that though Bitcoin’s correlation to the S&P 500 has dropped over the past 30 days, it remains higher than usual.

Crypto derivatives may be sending hints about the future, with Coinglass data showing open interest in the futures market for both BTC and ETH is down. The shift signals bullish momentum could be fading.

Over the past 48 hours, investors have taken “elevated liquidations,” in the derivatives market but “its far from some of the more extreme days we’ve seen so far this year,” Lau added.

Ripping off the bandage

The key question for Bitcoin’s performance over the next year is whether or not investor behavior is under or overshooting hawkish expectations for Fed hikes according to David Grider, head of research at Grayscale Investments.

Grider argues there may be reason for more investor optimism. Based on Bitcoin’s performance during its past bull cycles, BTC could see “a more muted impact from Fed policy going forward, once actual rate hikes begin,” Grider told Yahoo Finance.

According to him, BTC has traded “roughly in line” with the yield spread between the 10-year and 2-year Treasury notes over the past two years. Less than a month after that spread started shrinking in October 2021, Bitcoin’s price peaked just below $69,000.

Both trends have reversed in recent weeks, and Grider suggests this could be an early signal that investor sentiment is improving over the medium-term. As an example, he pointed to the Fed rate hiking cycle in 2013.

"Once the bandage was ripped off and the rate hiking cycle started, Bitcoin rallied for the next year until the fifth rate hike in December 2017, and the Fed balance sheet reduction accelerated," Grider wrote in GrayScale's January report.

David Hollerith covers cryptocurrency for Yahoo Finance. Follow him @dshollers.

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