Big-Money Investors Who Boosted Bitcoin’s Price Might Now Crash It

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A key narrative in the crypto world in 2021 was the arrival of institutional investors to the space. Tesla (TSLA) bought $1.5 billion worth of bitcoin (BTC) and Wall Street banks like JPMorgan Chase (JPM) and Morgan Stanley (MS), as well as hedge funds, started allocating client assets to bitcoin that year.

Not only were these institutional investors a sign of growing mainstream acceptance, they also appeared to drive up prices. Crypto boomed with the sector’s market capitalization growing 185% that year.

Now, as the crypto market's latest swoon wipes off $1.25 trillion from the industry's all-time high market capitalization reached late last year, the question has risen: What role is institutional money playing in the crash? Or to put it more bluntly, are institutional investors making things worse?

One thing we know: The crypto market is increasingly correlated to the stock market, and institutional investors appear to have heightened that correlation. And when the stock market goes down, it takes crypto with it.

“The influx of institutional interest in BTC, which started to pick up in early 2020 with public declarations of interest from stalwarts of traditional investing, such as Paul Tudor Jones and Renaissance Technologies, coincides with a sustained jump in the 60-day correlation between BTC and the S&P 500,” according to an April 2022 report by Genesis Trading. (Genesis is a subsidiary of Digital Currency Group, which also owns CoinDesk.)

Stocks are now in a bear market after the Federal Reserve’s latest rate hike of 50 basis points, or 0.5 percentage point, at its latest Federal Open Market Committee (FOMC) meeting in May.

Both crypto and traditional markets briefly skyrocketed after Fed Chair Jerome Powell ruled out a larger increase than that at upcoming meetings, but they quickly reversed course after what Paul Hickey, co-founder of Bespoke Market Intelligence, called a “reality check.”

The S&P 500 and the Nasdaq both dropped nearly 5% the day after the meeting on May 4. Bitcoin fell over 10%, now down over 35% year to date. For market watchers, the upshot was how closely they're traveling in tandem.

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