Wall Street gave it a tailwind on Tuesday, when investors finally decided they’d seen enough bad days in a row. With futures contracts for the Dow Jones industry average (^DJI 0.88%), S&P500 (^GSPC 1.05%)and Nasdaq Composite (^IXIC 1.53%) Up between 1% and 2%, it appeared that the major market indices would have a good morning after the S&P made new lows for 2022 at the close on Monday.
Bitcoin (BTC 5.03%) also bounced back above $20,000 after experiencing severe recent pressures, and many other digital assets and cryptocurrency stocks have seen notable gains. But with Bitcoin and ether (ETH 3.93%) still well below their respective 2021 highs, the unanswered question is whether Tuesday’s rally will finally be the one to end the wintry mood in crypto markets – or simply fizzle out like so many other rebound attempts in recent weeks have done.
What is happening in crypto?
Bitcoin’s 7% gains to around $20,250 were representative of movements across many digital assets. Ethereum is also up more than 7%, challenging $1,400 for the first time in more than a week. Solana and chain link rose 7% and 9%, respectively, while Uniswap led the way among major digital assets with a jump of 18%.
Stocks linked to the success of cryptocurrencies also held up well in premarket trading on Tuesday morning. Coinbase Global took up more than 6% while mining companies Marathon Digital Inventory and Riot Blockchain up 8% and 7% respectively. software company MicroStrategyBetter known for its high balance sheet exposure to Bitcoin than its core business, the stock was up nearly 6% Tuesday morning ahead of the regular trading session.
The US dollar is taking a breather
Many cryptocurrency watchers considered the US dollar’s performance to be the main reason behind the rise of Bitcoin and other digital assets. Investors are increasingly concerned about the pace at which the US dollar has appreciated against major foreign currencies, particularly the British pound, which fell to a decade-low earlier this week.
However, at least for today, the greenback has taken a breather. The pound gained more than 1% against the US dollar to hit $1.08. The euro edged up slightly but stayed below par to reach $0.965.
Still, it’s important not to exaggerate the role FX markets could play in holding cryptocurrency values down. Even measuring Bitcoin’s value in British pounds, for example, the price of the leading digital asset is still down well over half from its peak in late 2021.
When will crypto really go higher?
In the short term, political tactics aimed at slowing the pace of market movements can halt the fall in asset prices, be it stocks, forex or cryptocurrencies. Over longer horizons, however, macroeconomic factors will continue to play a crucial role and that is where investors currently face the greatest uncertainty.
However, at least to date, digital assets like bitcoin have proved disappointingly correlated with the higher-growth part of the stock market. Just as higher interest rates have challenged how well smaller, more speculative companies can attract the capital needed to fuel future growth, they have also made cryptocurrency investors more cautious about focusing on fundamentals rather than highly leveraged trading vehicles that account for so much of the volatility in the crypto markets.
These correlations could turn to Bitcoin’s advantage if stock markets stage a sustained recovery from current levels. However, over the long term, if Bitcoin is to realize its full potential, it must prove its enduring status as an entirely different asset class with the ability to outperform regardless of what other markets are doing. That was largely the case early in Bitcoin’s history, but skeptical investors need to experience it again to regain confidence in digital asset markets.
Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin, ChainLink, Coinbase Global, Inc., Ethereum, Solana, and Uniswap Protocol Token. The Motley Fool has a disclosure policy.
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