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The Motley Fool

Why Bitcoin, Ethereum, and Dogecoin Are Slumping Today

By Chris MacDonald,


What happened

Today, Bitcoin (CRYPTO: BTC) , Ethereum (CRYPTO: ETH) and Dogecoin (CRYPTO: DOGE) , all top-10 cryptocurrencies by market capitalization, were singing the blues. These three top tokens had sunk 4.2%, 4.6%, and 3.1% over the past 24 hours at 11:30 a.m. ET.

Concerns that the new omicron coronavirus variant could slow capital flows into risk assets continues to be a key headwind crypto investors are focused on. Additionally, speculation that investors could choose to take gains this year, rather than wait for additional clarification on crypto taxation rules in 2022, appears to have some investors eager to take some profits earlier than usual.

Image source: Getty Images.

So what

Crypto markets have tended to move in higher correlation to equity markets in recent days. Whether the similarity in momentum we're seeing between crypto markets and higher-risk equities continues from here remains to be seen.

However, what's clear is that a significant amount of leverage continues to exist in crypto markets. When risk-off sentiment takes hold, as it has in the wake of this recent variant discovery, leverage-driven wash-outs can drive significantly higher downside volatility in such asset classes.

Additionally, crypto investors and traders who have booked large gains this year may be enticed to take these gains now, rather than wait and see what next year brings. Uncertainty with respect to specifics on crypto taxation rates and on the ultimate take crypto investors will receive from their holdings has some considering trimming positions now.

Now what

With the crypto market now starting to resemble "hyper-growth equities on steroids," the leverage-driven upside momentum we've seen earlier this year may revert to the downside. Right now, investors appear to be taking a broadly bearish, or at least risk-off, view of the markets. For crypto traders, this volatility may simply be too much to sit through right now.

For longer-term investors, perhaps the downside moves we've seen in Bitcoin, Ethereum, or even Dogecoin and other meme tokens present an intriguing entry point. Of course, questions as to when this slump will ultimately abate remain. Right now, it appears a wait-and-see approach is what the broader market favors.

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Chris MacDonald owns shares of Ethereum. The Motley Fool owns shares of and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy .

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