Crypto Meltdown – Have we Seen the Bottom?

Cryptocurrencies like Bitcoin have bounced back from their crash. Are they buys?

Cryptocurrencies have partially recovered from their huge meltdown in the first half of the year. Bitcoin (CRYPTO: BTC) is up 23% from the bottom on July 2, and other cryptocurrencies are rising also.

The first half of this year was a tough time for cryptocurrency. The “stable coin” Terra collapsed when it lost its peg to the U.S. dollar, and the exchange Celsius went bankrupt. These developments may have shaken investor confidence in crypto, causing them to withdraw their funds. Also, interest rates have been rising this year, and high interest rates generally make risky investments less appealing than they’d otherwise be.

So, we are finally seeing cryptocurrency rise after a tough first half. The question is, have we seen the bottom? Sometimes assets temporarily rise during mostly-downward trends. This phenomenon is called a “bear market rally,” and we’ve seen it across several asset classes this year.

Read on, as I attempt to determine whether crypto has truly bottomed out, or is just in a bear market rally.

cryptocurrency, crypto, blockcahin

Image source: Getty Images

Why crypto prices are rising again

There appear to be two main reasons why crypto prices are rising right now:

  1. A lack of bad news.
  2. The observed correlation between crypto prices and tech stock prices.

The lack of bad news is easy enough to understand. Two events–the Terra collapse and the Celsius bankruptcy–shook investors’ faith in crypto this year. They made it look like stable coins and exchanges are untrustworthy. However, it’s been a few months since these events occurred, and nothing similar has happened since. So, perhaps people are re-gaining faith in the crypto market.

Second, we have the well-known correlation between crypto prices and tech stock prices. A correlation is the tendency for two things to move together. Correlations range from negative one (-1.0) to one (1.0). Negative one means two things move in the opposite direction, zero means there’s no relationship, and one means they move in the same direction.

The correlation between tech stocks and Bitcoin has been estimated at 0.71. That indicates a strong positive correlation. When tech stocks rise, we expect Bitcoin to rise, and U.S. tech stocks have risen about 12% over the last month. So, we are seeing Bitcoin behave the way statistics would predict.

Don’t assume the worst is behind us

Over the last month, we’ve seen Bitcoin and other cryptocurrencies rise. It’s been a good time for crypto investors. However, it doesn’t mean that the worst is behind us. There are many reasons to remain cautious about cryptocurrency, such as:

  • Rising interest rates. Cryptocurrency’s slide in the first half of the year correlated with rising interest rates. Interest rates are still rising, so we could see more weakness in the second half.
  • Questionable use cases. Some events this year called into question the “usefulness” of cryptocurrency. For example, the Terra collapse cast doubt on the idea that “stable” cryptos can be used as stores of value. The collapse of the NFT (non-fungible token) market likewise cast doubt on the idea that Ethereum-powered “apps” will go mass market. These issues haven’t been flaring up much in the last month, but they still lurk in the background

On the whole, cryptocurrency has proven to be remarkably resilient in the 13 years since it was invented. However, it’s a volatile asset class that is going through some tough times this year. It would pay to play it safe with crypto, if you choose to invest in it.

Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool recommends Bitcoin and Ethereum.

More on Investing

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

3 of the Best Canadian Stocks to Buy and Hold in a TFSA

Given their reliable business models, consistent financials, and healthy growth prospects, these three Canadian stocks are ideal additions to your…

Read more »

woman checks off all the boxes
Dividend Stocks

What Every Investor Should Know Before Buying BCE for its Dividend

BCE (TSX:BCE) stock looks like an untimely trap, but there's a strong case for buying as the firm looks to…

Read more »

senior man and woman stretch their legs on yoga mats outside
Dividend Stocks

2 TSX Dividend Stocks Retirees Can Buy and Hold for the Next Decade

These dividend stocks provide the right mix of growth, income, and stability for the long term.

Read more »

Paper Canadian currency of various denominations
Dividend Stocks

3 Stocks to Build a Strong Canadian Income Portfolio

While no dividend is guaranteed, these companies have shown their ability to generate resilient cash flows and return capital.

Read more »

stocks climbing green bull market
Dividend Stocks

2 High-Yield Dividend Stocks to Buy and Hold for a Decade of Income

With resilient business models, reliable cash flows, high yields, and healthy growth prospects, these two Canadian stocks are ideal for…

Read more »

3 colorful arrows racing straight up on a black background.
Investing

Buy the Dip: 3 Stocks to Buy Today and Hold for the Next 5 Years

These stocks are under pressure, but should be solid dividend picks over the medium term.

Read more »

Person holds banknotes of Canadian dollars
Dividend Stocks

I’d Put My Whole 2026 TFSA Contribution Into this 5.5% Passive-Income Payer

This passive-income payer has raised its dividend every year since 1995. Moreover, it has room to increase its dividend in…

Read more »

dividends grow over time
Dividend Stocks

$10,000 Invested at 8% for 20 Years Could Become $46,610

$10,000 doesn’t need perfect timing to become meaningful wealth — it mainly needs time and compounding.

Read more »