Stock market turbulence has taken a turn to the downside so far in the new year, and based on premarket trading, it looked likely that Friday would continue the trend lower for major stock market indexes. As of 8:30 a.m. ET, Dow Jones Industrial Average (DJINDICES:^DJI) futures were down 134 points to 34,482. S&P 500 (SNPINDEX:^GSPC) futures had dropped 29 points to 4,445, while Nasdaq Composite (NASDAQINDEX:^IXIC) futures had declined 147 points to 14,694.
Many investors in the cryptocurrency market believed that the digital asset class would prove to be a store of value during tough times for stocks. However, that hasn’t been the case recently, as crypto stocks have in many cases seen declines similar in size to what investors in tech stocks and other high-growth areas have experienced. In particular, the crypto arena is taking a big hit Friday morning; below, you’ll learn more about what’s happening and why.
Declines in major cryptocurrencies have come fast and furious over the past 24 hours. Bitcoin (CRYPTO:BTC) has fallen almost 9%, trading just above $38,000 and hitting levels last seen six months ago. Ether (CRYPTO:ETH) has fallen an even steeper 12% to around $2,775, and Solana (CRYPTO:SOL) has taken a 14% hit to $118. Most other major crypto tokens are seeing similarly sized percentage drops.
One of the latest catalysts for the one-day plunge in crypto prices came yesterday, when the Russian central bank proposed making trading, mining, and usage of cryptocurrencies illegal. The Bank of Russia’s proposal wouldn’t immediately make owning crypto illegal, but presumably further efforts to obtain it through purchases and sales would be subject to the trading rules.
The Russian central bank report cites many of the factors that other leading financial institutions have cited in other parts of the world. Crypto is popularly used in fraudulent illegal activities, so clamping down on the market could potentially make it more difficult for criminals to conduct financial transactions. With Russia in particular, the threat of capital exiting the national economy could also destabilize the country’s financial system.
Bad news for crypto stocks
Beyond the cryptocurrencies themselves, crypto-linked investments also suffered. ProShares Bitcoin Strategy ETF (NYSEMKT:BITO), a Bitcoin exchange-traded fund that tracks futures prices, was down more than 10% in premarket trading.
Moreover, companies that have been linked to the crypto market also struggled. MicroStrategy (NASDAQ:MSTR), which was one of the first companies to embrace Bitcoin as a balance sheet asset, was down more than 8% in the premarket. Crypto mining specialist Riot Blockchain (NASDAQ:RIOT) also fell 8%.
No one should be surprised at crypto volatility
Cryptocurrency markets have been huge winners over the past decade, but they’ve also come with crushing volatility. Declines of 80% or more from all-time highs have been common.
The big question, though, is whether cryptocurrencies will serve a function as an alternative asset class without close correlations to the stock market. At times in the past, stocks and crypto investments moved very differently. As crypto has become more mainstream, though, there’ve been more signs of their moving in the same directions.
The long-term arguments for cryptocurrency remain largely intact, but that doesn’t mean investors won’t see big downward moves along the way. Even in the best-case scenario, crypto investors will have to endure stomach-wrenching drops like this on a regular basis.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.