Cryptoassets have been fairly indecisive this week, fluctuating between attempted recovery and backsliding close to the lows. The trajectory has largely tracked equities, which performed poorly last week ahead of this week’s rate decision, and have chopped around this week with the Fed signaling for a rate hike in March. Bitcoin has admittedly ticked up a bit this week while equities are overall down, but any conversations about the end of correlation between bitcoin and stocks seems premature; for the most part they’ve traded in lockstep this week. It helps to take a few minutes to consider the year’s price action to date so far, and compare it to other selloffs.

To start with S&Ps are down 9% on the year as of writing, and BTC is down about 20%. This ratio is actually not that dramatic, a 2:1 beta for BTC is not that extreme historically during sharp moves, as BTC is still considered a risk asset. In March 2020, S&Ps dropped 35% while BTC dropped 60%, and last September the Evergrande scare brought S&Ps down 4% and BTC down 25%. One of the selling points of crypto has always been that it’s an uncorrelated asset. This is a claim which has never stood up to the test of risk-off moves. However, when you zoom out a bit, correlations do break down considerably. We go through cycles of high correlation and then cycles of almost none. Crypto recoveries tend to lag equity recoveries, but that’s not true in every case. The rally at the end of 2020 began in a period where equities were still scuffling; by the time equities could truly be said to be in recovery, the BTC bull market was already firmly in place.

For the most part, I’ve been discussing BTC here, and that’s because in these types of markets, knowing the price action of Bitcoin covers most of what’s happening in the entire space. Decorrelation within crypto, particularly between BTC and layer-1s, is something smarter people than I have been predicting coming into 2022, and it does make sense, as BTC dominance drops. However, in the short-term of risk-off moves, that goes out the window. BTC dominance tends to rally during these moves, as alts are lower cap and trade with higher beta. Since the beginning of the year, BTC.D has ticked up from 39% to 43%. Correlation among cryptocurrencies has been exceptionally high, with even the best performers, like FTM and ATOM, beginning to revert to the rest of the pack. This too shall pass; but probably not until this risk-off move ceases.

So, the big question: when will the risk-off move end? Or to put it in the terms that we get asked continuously: “Is the bottom in yet?” It should come as no surprise to frequent readers of this space that we’re not going to venture a guess. However, we can put forward some observations that will help the reader make their own call.

First, it’s going to be difficult for crypto to recover without equities at least stabilizing. That’s why every DeFi Degen has spent at least some of their time this year LARPing as an economist; the possibility of a crypto recovery is low if equities are dropping. It’s probably not necessary that equities resume their ten-year consistent rally, but it’s hard for a risk asset to perform during a risk-off environment.

Second, the longer we trade close to the lows, the more difficult it will be to stage a sharp bounce. If there is a quick impulse move lower, there is a good possibility for the market to revert. But the longer we languish below any given level, the more that level seems like resistance, rather than failed support. Any upticks past the level are more likely to be met with some relief selling.

And third, something we learned in May of last year: outside money is not going to trigger a recovery. There is certainly fresh money which has only recently gotten access to crypto markets, whether its through the ETF, through NDFs with desks like Cumberland, or through institutions that have recently gotten the ability to trade spot. But what we saw last year is that most asset managers, when first getting access to a new asset class, aren’t willing to try to catch a falling knife on their first trade. We saw this on the move under $40k last year; these institutions would rather wait until crypto finds its own floor, and try to purchase after the bounce has already begun. Crypto will have to find its own way out of this hole.

With a Deribit expiration coming shortly, a note from our options traders: We expect high momentum pre-expiration, as market makers are short a fair amount of upside strikes in both BTC and ETH. Strikes are fairly far out, but automated margin calls could push us closer.