Somehow Twitter’s business meltdown wasn’t the biggest financial news last week.
The biggest story … perhaps of the year … relates to cryptocurrencies.
What started as a buyout of crypto exchange FTX has turned into a story rife with theft, fraud and Ponzi schemes.
It led to one of the largest bitcoin crashes in recent memory.
The Third Crypto Crash of 2022
This most recent crash — where bitcoin’s value fell more than 25% in a matter of days — started with a balance sheet report for crypto hedge fund, Alameda Research.
A second report claimed the owner of FTX … and the crypto hedge fund … may be insolvent.
Following that news, Binance, another massive crypto exchange, said it would liquidate its holdings of FTX … causing cryptos to implode:
As I write, bitcoin is down almost 65% in 2022.
From Sunday, November 6, to Wednesday, November 9 — when the reports were issued — bitcoin dropped 25.4%!
The turbulent week ended with FTX and Alameda filing for bankruptcy and cryptocurrencies left in turmoil.
The Market Response: A Drop That Didn’t Happen
Unlike with previous crypto crashes, the stock market had a different answer last week:
Despite being down more than 15% for the year, the S&P 500 rallied last week on the heels of a Consumer Price Index (CPI) report that showed inflation may be cooling off.
It means two things:
- Investors are looking for any bright news to push stock prices higher.
- There’s a decoupling of crypto prices and the market.
On the first point, weaker-than-expected inflation spurred a massive market rally on Thursday:
- The S&P 500 rose 5.5% — the largest one-day jump since April 2020.
- The Nasdaq Composite jumped up 7.4% — its biggest one-day jump since March 2020.
Both indexes tacked on additional gains on Friday.
To the latter point, you can line up the two charts above and see the S&P 500 and bitcoin dropped at the same time … except for last week.
What’s Next for Crypto and the Market
Last week’s action was big, but I don’t think it was anything more than another bear market rally.
And the market is going to continue tying itself to economic data, such as inflation or jobs data:
The CPI measures the average change in prices paid by consumers.
In October, expectations were that prices would jump 0.6%.
Instead, prices only rose 0.4% — leveling from September.
This was the good news investors were looking for to push stock prices higher.
Bottom line: As for crypto prices, the bankruptcy of one of the industry’s powerhouses — FTX — adds to an industry rife with crises.
The good news is that bitcoin has weathered similar storms.
The bad news is that crypto’s troubles aren’t over.
Bitcoin, as an asset, is oversold and remains overvalued.
Previous support levels of $20,000 will now represent resistance.
The recent drop may entice you to buy bitcoin, but I would exercise a great deal of caution before doing so.
Note: If you’re looking for insights into the crypto world, my colleague and crypto expert Ian King is your guy. Click here to see why.
Safe trading,
Matt Clark, CMSA®
Research Analyst, Money & Markets
Matt Clark is the research analyst for Money & Markets. He is a certified Capital Markets & Securities Analyst with the Corporate Finance Institute and a contributor to Seeking Alpha. Before joining Money & Markets, he was a journalist/editor for 25 years, covering college sports, business and politics.
